Kulicke and Soffa Industries, Inc.'s (NASDAQ:KLIC) Stock Is Going Strong: Is the Market Following Fundamentals?
Most readers would already be aware that Kulicke and Soffa Industries' (NASDAQ:KLIC) stock increased significantly by 14% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Kulicke and Soffa Industries' ROE today.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
Check out our latest analysis for Kulicke and Soffa Industries
How To Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Kulicke and Soffa Industries is:
27% = US$315m ÷ US$1.2b (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.27 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.
Kulicke and Soffa Industries' Earnings Growth And 27% ROE
First thing first, we like that Kulicke and Soffa Industries has an impressive ROE. Secondly, even when compared to the industry average of 18% the company's ROE is quite impressive. So, the substantial 52% net income growth seen by Kulicke and Soffa Industries over the past five years isn't overly surprising.
Next, on comparing with the industry net income growth, we found that Kulicke and Soffa Industries' growth is quite high when compared to the industry average growth of 28% in the same period, which is great to see.
Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Kulicke and Soffa Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Kulicke and Soffa Industries Using Its Retained Earnings Effectively?
Kulicke and Soffa Industries' ' three-year median payout ratio is on the lower side at 13% implying that it is retaining a higher percentage (87%) of its profits. So it looks like Kulicke and Soffa Industries is reinvesting profits heavily to grow its business, which shows in its earnings growth.
Additionally, Kulicke and Soffa Industries has paid dividends over a period of five years which means that the company is pretty serious about sharing its profits with shareholders.
Conclusion
On the whole, we feel that Kulicke and Soffa Industries' performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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