Stock Analysis

Shinpo Co., Ltd. (TYO:5903) Stock's Been Sliding But Fundamentals Look Decent: Will The Market Correct The Share Price In The Future?

  •  Updated
TSE:5903
Source: Shutterstock

With its stock down 5.1% over the past month, it is easy to disregard Shinpo (TYO:5903). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Shinpo's ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

See our latest analysis for Shinpo

How To 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 Shinpo is:

7.7% = JP¥370m ÷ JP¥4.8b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.08 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. 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.

Shinpo's Earnings Growth And 7.7% ROE

At first glance, Shinpo's ROE doesn't look very promising. Although a closer study shows that the company's ROE is higher than the industry average of 6.1% which we definitely can't overlook. Still, Shinpo's net income growth of 4.7% over the past five years was mediocre at best. Bear in mind, the company does have a low ROE. It is just that the industry ROE is lower. So that could be one of the factors that are causing earnings growth to stay low.

Next, on comparing Shinpo's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 4.3% in the same period.

past-earnings-growth
JASDAQ:5903 Past Earnings Growth December 25th 2020

Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Shinpo is trading on a high P/E or a low P/E, relative to its industry.

Is Shinpo Efficiently Re-investing Its Profits?

Shinpo's low three-year median payout ratio of 13% (or a retention ratio of 87%) should mean that the company is retaining most of its earnings to fuel its growth. However, the low earnings growth number doesn't reflect this fact. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

Moreover, Shinpo has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

On the whole, we do feel that Shinpo has some positive attributes. In particular, it's great to see that the company is investing heavily into its business and along with a moderate rate of return, that has resulted in a respectable growth in its earnings. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

If you’re looking to trade Shinpo, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


Valuation is complex, but we're helping make it simple.

Find out whether Shinpo is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

About TSE:5903

Shinpo

Shinpo Co., Ltd. manufactures and sells smokeless grills in Japan, China, South Korea, Taiwan, and internationally.

Excellent balance sheet with acceptable track record.

Stock Analysis

No articles found