Will Weakness in DEPPON LOGISTICS Co., LTD.'s (SHSE:603056) Stock Prove Temporary Given Strong Fundamentals?

It is hard to get excited after looking at DEPPON LOGISTICS' (SHSE:603056) recent performance, when its stock has declined 19% over the past three months. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on DEPPON LOGISTICS' ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for DEPPON LOGISTICS

How Do You 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 DEPPON LOGISTICS is:

9.9% = CN¥770m ÷ CN¥7.8b (Based on the trailing twelve months to March 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every CN¥1 worth of equity, the company was able to earn CN¥0.10 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

DEPPON LOGISTICS' Earnings Growth And 9.9% ROE

At first glance, DEPPON LOGISTICS' ROE doesn't look very promising. However, the fact that the company's ROE is higher than the average industry ROE of 7.9%, is definitely interesting. Consequently, this likely laid the ground for the decent growth of 14% seen over the past five years by DEPPON LOGISTICS. Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. So there might well be other reasons for the earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

Next, on comparing DEPPON LOGISTICS' net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 12% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is DEPPON LOGISTICS fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is DEPPON LOGISTICS Making Efficient Use Of Its Profits?

DEPPON LOGISTICS' three-year median payout ratio to shareholders is 22% (implying that it retains 78% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Besides, DEPPON LOGISTICS has been paying dividends over a period of six years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with DEPPON LOGISTICS' performance. Particularly, we like that the company is reinvesting heavily into its business at a moderate rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com