Semiconductor Manufacturing International Corporation (HKG:981) Stock is down but fundamentals look good: will the market correct the stock price going forward?

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It’s hard to get excited after looking at the recent performance of Semiconductor Manufacturing International (HKG:981), as its stock is down 12% in the past month. But if you pay close attention, you might find that its leading financial indicators look pretty decent, which could mean the stock could potentially rise in the long run as markets generally reward more resilient long-term fundamentals. In particular, we will be paying attention to Semiconductor Manufacturing International’s ROE today.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

See our latest analysis for Semiconductor Manufacturing International

How do you calculate return on equity?

The ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

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

8.5% = US$2.2 billion ÷ US$26 billion (based on trailing 12 months to March 2022).

“Yield” refers to a company’s earnings over the past year. This therefore means that for each investment of HK$1 by its shareholder, the company generates a profit of 0.08 HK$.

What does ROE have to do with earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Earnings growth and ROE of 8.5% from Semiconductor Manufacturing International

At first glance, Semiconductor Manufacturing International’s ROE does not look very promising. We then compared the company’s ROE to the entire industry and were disappointed to see that the ROE is below the industry average of 12%. Despite this, Semiconductor Manufacturing International has been able to significantly increase its net profit, at a rate of 53% over the past five years. Thus, there could be other aspects that positively influence the profit growth of the company. For example, the business has a low payout ratio or is efficiently managed.

Then, comparing with the growth in net income of the industry, we found that the growth of Semiconductor Manufacturing International is quite high compared to the industry average growth of 19% over the same period, which is great to see.

SEHK: 981 Past Earnings Growth July 18, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. Is Semiconductor Manufacturing International valued fairly compared to other companies? These 3 assessment metrics might help you decide.

Is Semiconductor Manufacturing International Reinvesting Profits Effectively?

Since Semiconductor Manufacturing International does not pay any dividends to its shareholders, we infer that the company has reinvested all of its profits to grow its business.

Summary

Overall, we think Semiconductor Manufacturing International certainly has some positive factors to consider. Even despite the low rate of return, the company posted impressive earnings growth thanks to massive reinvestment in its business. That said, in studying the latest analyst forecasts, we found that while the company has seen growth in past earnings, analysts expect future earnings to decline. Are these analyst expectations based on general industry expectations or company fundamentals? Click here to access our analyst forecast page for the company.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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