Ssangyong Cement Industrial Co., Ltd.'s (KRX:003410) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Ssangyong Cement Industrial (KRX:003410) has had a rough week with its share price down 2.0%. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Specifically, we decided to study Ssangyong Cement Industrial's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Ssangyong Cement Industrial

How To Calculate Return On Equity?

Return on equity can be calculated by using the formula:

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

So, based on the above formula, the ROE for Ssangyong Cement Industrial is:

7.3% = ₩126b ÷ ₩1.7t (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every ₩1 of its shareholder's investments, the company generates a profit of ₩0.07.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Ssangyong Cement Industrial's Earnings Growth And 7.3% ROE

On the face of it, Ssangyong Cement Industrial's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 3.1%, is definitely interesting. This certainly adds some context to Ssangyong Cement Industrial's moderate 5.6% net income growth seen over the past five years. That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. Therefore, the growth in earnings could also be the result of other factors. E.g the company has a low payout ratio or could belong to a high growth industry.

As a next step, we compared Ssangyong Cement Industrial'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 0.4%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is A003410 worth today? The intrinsic value infographic in our free research report helps visualize whether A003410 is currently mispriced by the market.

Is Ssangyong Cement Industrial Using Its Retained Earnings Effectively?

Ssangyong Cement Industrial has a significant three-year median payout ratio of 58%, meaning that it is left with only 42% to reinvest into its business. This implies that the company has been able to achieve decent earnings growth despite returning most of its profits to shareholders.

Additionally, Ssangyong Cement Industrial has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 136% over the next three years. Regardless, the future ROE for Ssangyong Cement Industrial is speculated to rise to 11% despite the anticipated increase in the payout ratio. There could probably be other factors that could be driving the future growth in the ROE.

Summary

On the whole, we do feel that Ssangyong Cement Industrial has some positive attributes. Specifically, its respectable ROE which likely led to the considerable growth in earnings. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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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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