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Amkor Technology (NASDAQ:AMKR) has had a great run on the share market with its stock up by a significant 45% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Amkor Technology's ROE in this article.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
View our latest analysis for Amkor Technology
How To 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 Amkor Technology is:
23% = US$820m ÷ US$3.5b (Based on the trailing twelve months to September 2022).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each $1 of shareholders' capital it has, the company made $0.23 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
Amkor Technology's Earnings Growth And 23% ROE
To begin with, Amkor Technology has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 19% also doesn't go unnoticed by us. As a result, Amkor Technology's exceptional 34% net income growth seen over the past five years, doesn't come as a surprise.
As a next step, we compared Amkor Technology's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 28%.
The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Amkor Technology fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Amkor Technology Using Its Retained Earnings Effectively?
Amkor Technology has a really low three-year median payout ratio of 6.3%, meaning that it has the remaining 94% left over to reinvest into its business. So it looks like Amkor Technology is reinvesting profits heavily to grow its business, which shows in its earnings growth.