Samsung Electronics' (KRX:005930) stock is up by a considerable 21% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Samsung Electronics' ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
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 Samsung Electronics is:
9.6% = ₩26t ÷ ₩276t (Based on the trailing twelve months to December 2020).
The 'return' is the yearly profit. One way to conceptualize this is that for each ₩1 of shareholders' capital it has, the company made ₩0.10 in profit.
What Is The Relationship Between ROE And Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Samsung Electronics' Earnings Growth And 9.6% ROE
On the face of it, Samsung Electronics' ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 6.1%, is definitely interesting. Yet, Samsung Electronics has posted measly growth of 2.4% over the past five years. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to stay low.
We then performed a comparison between Samsung Electronics' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 2.7% in the same period.
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. This then helps them determine if the stock is placed for a bright or bleak future. Is A005930 fairly valued? This infographic on the company's intrinsic value has everything you need to know.
Is Samsung Electronics Using Its Retained Earnings Effectively?
Despite having a normal three-year median payout ratio of 37% (or a retention ratio of 63% over the past three years, Samsung Electronics has seen very little growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Additionally, Samsung Electronics has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 19% over the next three years. As a result, the expected drop in Samsung Electronics' payout ratio explains the anticipated rise in the company's future ROE to 15%, over the same period.
In total, it does look like Samsung Electronics has some positive aspects to its business. Specifically, we like that the company is reinvesting a huge chunk of its profits at a respectable rate of return. This of course has caused the company to see a good amount of growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. 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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