Is Kozo Keikaku Engineering Inc.'s(TYO:4748) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Kozo Keikaku Engineering's (TYO:4748) 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. Specifically, we decided to study Kozo Keikaku Engineering'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Kozo Keikaku Engineering

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 Kozo Keikaku Engineering is:

25% = JP¥1.5b ÷ JP¥5.9b (Based on the trailing twelve months to December 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every ¥1 worth of equity, the company was able to earn ¥0.25 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.

Kozo Keikaku Engineering's Earnings Growth And 25% ROE

To begin with, Kozo Keikaku Engineering has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 8.6% also doesn't go unnoticed by us. Probably as a result of this, Kozo Keikaku Engineering was able to see a decent net income growth of 18% over the last five years.

Next, on comparing with the industry net income growth, we found that Kozo Keikaku Engineering's growth is quite high when compared to the industry average growth of 5.6% in the same period, which is great to see.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Kozo Keikaku Engineering fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kozo Keikaku Engineering Efficiently Re-investing Its Profits?

Given that Kozo Keikaku Engineering doesn't pay any dividend to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Summary

On the whole, we feel that Kozo Keikaku Engineering's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 2 risks we have identified for Kozo Keikaku Engineering by visiting our risks dashboard for free on our platform here.

When trading Kozo Keikaku Engineering or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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