HANMI Semiconductor Co., Ltd.'s (KRX:042700) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Most readers would already be aware that HANMI Semiconductor's (KRX:042700) stock increased significantly by 82% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study HANMI Semiconductor's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for HANMI Semiconductor

How Is ROE Calculated?

ROE 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 HANMI Semiconductor is:

18% = ₩46b ÷ ₩248b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.18 in profit.

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. 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. 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.

HANMI Semiconductor's Earnings Growth And 18% ROE

To start with, HANMI Semiconductor's ROE looks acceptable. On comparing with the average industry ROE of 8.5% the company's ROE looks pretty remarkable. This probably laid the ground for HANMI Semiconductor's moderate 6.3% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that HANMI Semiconductor's reported growth was lower than the industry growth of 12% in the same period, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. 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 HANMI Semiconductor is trading on a high P/E or a low P/E, relative to its industry.

Is HANMI Semiconductor Using Its Retained Earnings Effectively?

In HANMI Semiconductor's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 17% (or a retention ratio of 83%), which suggests that the company is investing most of its profits to grow its business.

Additionally, HANMI Semiconductor has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 10% over the next three years. As a result, the expected drop in HANMI Semiconductor's payout ratio explains the anticipated rise in the company's future ROE to 24%, over the same period.

Summary

In total, we are pretty happy with HANMI Semiconductor's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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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