Will Weakness in Dongjin Semichem Co., Ltd.'s (KOSDAQ:005290) Stock Prove Temporary Given Strong Fundamentals?

With its stock down 13% over the past month, it is easy to disregard Dongjin Semichem (KOSDAQ:005290). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Dongjin Semichem's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Dongjin Semichem

How To Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Dongjin Semichem is:

19% = ₩85b ÷ ₩441b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. One way to conceptualize this is that for each ₩1 of shareholders' capital it has, the company made ₩0.19 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Dongjin Semichem's Earnings Growth And 19% ROE

At first glance, Dongjin Semichem seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.1%. This probably laid the ground for Dongjin Semichem's significant 27% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Dongjin Semichem's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.7%.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Dongjin Semichem is trading on a high P/E or a low P/E, relative to its industry.

Is Dongjin Semichem Efficiently Re-investing Its Profits?

Dongjin Semichem has a really low three-year median payout ratio of 7.5%, meaning that it has the remaining 93% left over to reinvest into its business. So it looks like Dongjin Semichem is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Dongjin Semichem has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

In total, we are pretty happy with Dongjin Semichem's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 1 risk we have identified for Dongjin Semichem by visiting our risks dashboard for free on our platform here.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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