Kitagawa Seiki Co.,Ltd.'s (TYO:6327) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Kitagawa SeikiLtd's (TYO:6327) stock is up by a considerable 6.4% over the past week. 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 Kitagawa SeikiLtd's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Kitagawa SeikiLtd

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Kitagawa SeikiLtd is:

21% = JP¥400m ÷ JP¥1.9b (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 ¥0.21 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. 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.

A Side By Side comparison of Kitagawa SeikiLtd's Earnings Growth And 21% ROE

To begin with, Kitagawa SeikiLtd has a pretty high ROE which is interesting. Secondly, even when compared to the industry average of 6.1% the company's ROE is quite impressive. Under the circumstances, Kitagawa SeikiLtd's considerable five year net income growth of 29% was to be expected.

As a next step, we compared Kitagawa SeikiLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.3%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. Is Kitagawa SeikiLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kitagawa SeikiLtd Using Its Retained Earnings Effectively?

Conclusion

On the whole, we feel that Kitagawa SeikiLtd's 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. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 2 risks we have identified for Kitagawa SeikiLtd.

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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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