Nakabohtec Corrosion Protecting Co.,Ltd.'s (TYO:1787) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Nakabohtec Corrosion ProtectingLtd (TYO:1787) has had a great run on the share market with its stock up by a significant 28% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Nakabohtec Corrosion ProtectingLtd's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Nakabohtec Corrosion ProtectingLtd

How Do You Calculate Return On Equity?

Return on equity 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 Nakabohtec Corrosion ProtectingLtd is:

11% = JP¥724m ÷ JP¥6.8b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every ¥1 of its shareholder's investments, the company generates a profit of ¥0.11.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Nakabohtec Corrosion ProtectingLtd's Earnings Growth And 11% ROE

To begin with, Nakabohtec Corrosion ProtectingLtd seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.7%. However, we are curious as to how the high returns still resulted in flat growth for Nakabohtec Corrosion ProtectingLtd in the past five years. Therefore, there could be some other aspects that could potentially be preventing the company from growing. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by5.7% in the same period.

Earnings growth is an important metric to consider when valuing a stock. 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 Nakabohtec Corrosion ProtectingLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Nakabohtec Corrosion ProtectingLtd Using Its Retained Earnings Effectively?

Nakabohtec Corrosion ProtectingLtd doesn't pay any dividend, meaning that the company is keeping all of its profits, which makes us wonder why it is retaining its earnings if it can't use them to grow its business. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Conclusion

Overall, we feel that Nakabohtec Corrosion ProtectingLtd certainly does have some positive factors to consider. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Nakabohtec Corrosion ProtectingLtd's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. 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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