Semiconductor Manufacturing International (HKG: 981) had a difficult month with its stock price down 19%. However, the company’s fundamentals look pretty decent, and long-term financial data is generally aligned with future market price movements. Specifically, we decided to study the ROE of Semiconductor Manufacturing International in this article.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest analysis for Semiconductor Manufacturing International
How is the ROE calculated?
Return on equity can be calculated using the formula:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE of Semiconductor Manufacturing International is:
6.1% = US $ 1.4 billion ÷ US $ 23 billion (based on the last twelve months to September 2021).
The “return” is the profit of the last twelve months. Another way to think about this is that for every HK $ 1 worth of shares, the company was able to make HK $ 0.06 in profit.
What is the relationship between ROE and profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A Side-by-Side Comparison of Semiconductor Manufacturing International Profit Growth and 6.1% ROE
At first glance, Semiconductor Manufacturing International’s ROE doesn’t look very promising. Then, compared to the industry average ROE of 10%, the company’s ROE leaves us even less enthusiastic. Despite this, surprisingly, Semiconductor Manufacturing International has achieved exceptional net profit growth of 38% over the past five years. So, there might be other aspects that positively influence the profit growth of the company. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
Then, comparing with the industry net income growth, we found that the growth of Semiconductor Manufacturing International is quite high compared to the industry average growth of 20% over the same period, which is great to see.
The basis for attaching value to a business is, to a large extent, related to the growth of its profits. It is important for an investor to know whether the market has factored in the expected growth (or decline) in company earnings. By doing this, they will have an idea if the stock is heading for clear blue waters or if swampy waters are waiting for them. Is Semiconductor Manufacturing International valued enough compared to other companies? These 3 evaluation measures could help you decide.
Is Semiconductor Manufacturing International Efficiently Using Its Retained Earnings?
Semiconductor Manufacturing International does not currently pay any dividends, which essentially means that it has reinvested all of its profits back into the business. This certainly contributes to the high number of profit growth we discussed above.
Overall, we think Semiconductor Manufacturing International certainly has some positive factors to consider. Even despite the low rate of return, the company has shown impressive profit growth by reinvesting heavily in its operations. That said, studying the latest analysts’ forecast, we found that while the company has seen past earnings growth, analysts expect future earnings to decline. To learn more about the company’s future earnings growth forecast, take a look at this free analyst forecast report for the company to learn more.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.