Samsung Electro-Mechanics Co., Ltd.'s (KRX:009150) Stock Is Going Strong: Is the Market Following Fundamentals?

Samsung Electro-Mechanics' (KRX:009150) stock is up by a considerable 44% 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. Particularly, we will be paying attention to Samsung Electro-Mechanics' ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Samsung Electro-Mechanics

How Do You 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 Samsung Electro-Mechanics is:

11% = ₩643b ÷ ₩5.8t (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every ₩1 worth of shareholders' equity, the company generated ₩0.11 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. 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 Electro-Mechanics' Earnings Growth And 11% ROE

At first glance, Samsung Electro-Mechanics' ROE doesn't look very promising. However, the fact that the its ROE is quite higher to the industry average of 5.4% doesn't go unnoticed by us. Especially when you consider Samsung Electro-Mechanics' exceptional 22% net income growth 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.

Next, on comparing with the industry net income growth, we found that Samsung Electro-Mechanics' growth is quite high when compared to the industry average growth of 2.3% in the same period, which is great to see.

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. 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 Samsung Electro-Mechanics is trading on a high P/E or a low P/E, relative to its industry.

Is Samsung Electro-Mechanics Using Its Retained Earnings Effectively?

Samsung Electro-Mechanics' ' three-year median payout ratio is on the lower side at 14% implying that it is retaining a higher percentage (86%) of its profits. So it looks like Samsung Electro-Mechanics is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Samsung Electro-Mechanics is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 11% over the next three years. However, the company's ROE is not expected to change by much despite the lower expected payout ratio.

Summary

In total, we are pretty happy with Samsung Electro-Mechanics' performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. 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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