SILICON2 (KOSDAQ:257720) stock has risen by a remarkable 72% over the past three months. Given the company’s impressive performance, we decided to take a closer look at its financial indicators, as the financial health of a company in the long run usually determines market results. In particular, we decided to examine SILICON2’s return on equity in this article.

Return on equity (ROE) is a measure of how effectively a company increases its value and manages its investors’ money. In simpler terms, it measures a company’s profitability relative to shareholders’ equity.

Check out our latest analysis for SILICON2

How is ROE calculated?

The Formula for ROE Is:

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

Based on the above formula, the ROE for SILICON2 is:

35% = ₩57 billion ÷ ₩161 billion (based on the trailing twelve months to March 2024).

The “return” is the amount earned after taxes over the last twelve months. You can also imagine it like this: for every ₩ of equity value, the company was able to generate 0.35 ₩ in profit.

What does return on equity (ROE) have to do with earnings growth?

We’ve already established that return on equity (ROE) serves as an efficient measure of a company’s future earnings. Depending on how much of those earnings the company reinvests or “retains” and how effectively it does so, we can judge a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the return on equity and earnings retention, the higher a company’s growth rate will be compared to companies that don’t necessarily have these characteristics.

SILICON2 earnings growth and 35% ROE

First, we recognize that SILICON2 has a very high return on equity. Second, the company’s return on equity itself is quite impressive compared to the industry average of 7.0%. Under these circumstances, SILICON2’s significant net income growth of 62% over the next five years was to be expected.

In the next step, we compared SILICON2’s net profit growth with that of the industry. We were pleased to find that the company’s growth is higher than the average industry growth of 13%.

The basis for valuing a company depends largely on its earnings growth. It is important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). This will help them determine whether the stock’s future looks promising or bleak. A 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 should check whether SILICON2 is trading at a high or low P/E relative to its industry.

Does SILICON2 reinvest its profits efficiently?

SILICON2 currently does not pay regular dividends, which essentially means that it has reinvested all of its profits into the company. This definitely contributes to the high earnings growth we discussed above.

Summary

Overall, we are very pleased with SILICON2’s performance. In particular, we like that the company reinvests a large portion of its profits at a high rate of return. This has naturally led to significant earnings growth for the company. The latest industry analyst forecasts show that the company is expected to maintain its current growth rate. For more information on the latest analyst forecasts for the company, check out this visualization of analyst forecasts for the company.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.