Magnachip Semiconductor Corporation's (NYSE:MX) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

By
Simply Wall St
Published
May 28, 2021
NYSE:MX
Source: Shutterstock

Magnachip Semiconductor's (NYSE:MX) stock is up by a considerable 27% 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 Magnachip Semiconductor's ROE in this article.

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.

View our latest analysis for Magnachip Semiconductor

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Magnachip Semiconductor is:

19% = US$81m ÷ US$420m (Based on the trailing twelve months to March 2021).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.19 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

A Side By Side comparison of Magnachip Semiconductor's Earnings Growth And 19% ROE

To begin with, Magnachip Semiconductor seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 14%. Probably as a result of this, Magnachip Semiconductor was able to see a decent growth of 17% over the last five years.

Next, on comparing Magnachip Semiconductor's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 16% in the same period.

past-earnings-growth
NYSE:MX Past Earnings Growth May 29th 2021

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. Has the market priced in the future outlook for MX? You can find out in our latest intrinsic value infographic research report.

Is Magnachip Semiconductor Making Efficient Use Of Its Profits?

Summary

On the whole, we feel that Magnachip Semiconductor's performance has been quite good. 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 substantial growth in its earnings. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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