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Semiconductor Manufacturing International Corporation’s (HKG:981) Stock Is Going Strong: Have Financials A Role To Play?

Most readers would already be aware that Semiconductor Manufacturing International’s (HKG:981) stock increased significantly by 19% over the past three months. We wonder if and what role the company’s financials play in that price change as a company’s long-term fundamentals usually dictate market outcomes. In this article, we decided to focus on Semiconductor Manufacturing International’s ROE.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Semiconductor Manufacturing International

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How Do You Calculate Return On Equity?

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 Semiconductor Manufacturing International is:

6.4% = US$1.9b ÷ US$30b (Based on the trailing twelve months to March 2023).

The ‘return’ is the profit over the last twelve months. So, this means that for every HK$1 of its shareholder’s investments, the company generates a profit of HK$0.06.

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. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Semiconductor Manufacturing International’s Earnings Growth And 6.4% ROE

At first glance, Semiconductor Manufacturing International’s ROE doesn’t look very promising. We then compared the company’s ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 13%. Despite this, surprisingly, Semiconductor Manufacturing International saw an exceptional 53% net income growth over the past five years. So, there might be other aspects that are positively influencing the company’s earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Semiconductor Manufacturing International’s growth is quite high when compared to the industry average growth of 25% in the same period, which is great to see.

SEHK:981 Past Earnings Growth June 5th 2023

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Semiconductor Manufacturing International is trading on a high P/E or a low P/E, relative to its industry.

Is Semiconductor Manufacturing International Efficiently Re-investing Its Profits?

Given that Semiconductor Manufacturing International doesn’t pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

In total, it does look like Semiconductor Manufacturing International has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. With that said, the latest industry analyst forecasts reveal that the company’s earnings growth is expected to slow down. 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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