Are Robust Financials Driving The Recent Rally In Nihon Dengi Co., Ltd.'s (TSE:1723) Stock?

Nihon Dengi's (TSE:1723) stock is up by a considerable 32% 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 Nihon Dengi's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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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 Nihon Dengi is:

18% = JP¥7.7b ÷ JP¥42b (Based on the trailing twelve months to September 2025).

The 'return' is the yearly profit. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.18 in profit.

See our latest analysis for Nihon Dengi

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of Nihon Dengi's Earnings Growth And 18% ROE

To begin with, Nihon Dengi seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.7%. This probably laid the ground for Nihon Dengi's significant 21% net income growth seen over the past five years. However, there could also be other causes behind this growth. For instance, the company has a low payout ratio or is being managed efficiently.

We then compared Nihon Dengi's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% in the same 5-year 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. Doing so will help them establish if the stock's future looks promising or ominous. Is Nihon Dengi fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Nihon Dengi Making Efficient Use Of Its Profits?

The three-year median payout ratio for Nihon Dengi is 30%, which is moderately low. The company is retaining the remaining 70%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Nihon Dengi is reinvesting its earnings efficiently.

Moreover, Nihon Dengi is determined to keep sharing its profits with shareholders which we infer from its long history of five years of paying a dividend.

Summary

In total, we are pretty happy with Nihon Dengi's performance. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.