Sam-A Aluminium Company, Limited's (KRX:006110) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 33% over the past three months, it is easy to disregard Sam-A Aluminium Company (KRX:006110). However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Particularly, we will be paying attention to Sam-A Aluminium Company's ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Sam-A Aluminium Company

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 Sam-A Aluminium Company is:

1.3% = ₩3.4b ÷ ₩255b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. So, this means that for every ₩1 of its shareholder's investments, the company generates a profit of ₩0.01.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Sam-A Aluminium Company's Earnings Growth And 1.3% ROE

It is quite clear that Sam-A Aluminium Company's ROE is rather low. Even compared to the average industry ROE of 7.5%, the company's ROE is quite dismal. Despite this, surprisingly, Sam-A Aluminium Company saw an exceptional 25% net income growth over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that Sam-A Aluminium Company's reported growth was lower than the industry growth of 31% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Sam-A Aluminium Company fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sam-A Aluminium Company Efficiently Re-investing Its Profits?

Sam-A Aluminium Company has a really low three-year median payout ratio of 19%, meaning that it has the remaining 81% left over to reinvest into its business. So it looks like Sam-A Aluminium Company is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Besides, Sam-A Aluminium Company has been paying dividends over a period of five years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we do feel that Sam-A Aluminium Company has some positive attributes. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 2 risks we have identified for Sam-A Aluminium Company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.