Is Weakness In Ohmori Co.,Ltd. (TSE:1844) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

It is hard to get excited after looking at OhmoriLtd's (TSE:1844) recent performance, when its stock has declined 56% over the past three months. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to OhmoriLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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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 OhmoriLtd is:

8.7% = JP¥518m ÷ JP¥5.9b (Based on the trailing twelve months to July 2025).

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 ¥0.09 in profit.

View our latest analysis for OhmoriLtd

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

OhmoriLtd's Earnings Growth And 8.7% ROE

To begin with, OhmoriLtd seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 9.3%. This probably goes some way in explaining OhmoriLtd's moderate 18% growth over the past five years amongst other factors.

Next, on comparing with the industry net income growth, we found that OhmoriLtd's growth is quite high when compared to the industry average growth of 7.5% in the same period, which is great to see.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about OhmoriLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is OhmoriLtd Using Its Retained Earnings Effectively?

OhmoriLtd has a healthy combination of a moderate three-year median payout ratio of 36% (or a retention ratio of 64%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, OhmoriLtd has paid dividends over a period of nine years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we are quite pleased with OhmoriLtd'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. 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. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 4 risks we have identified for OhmoriLtd.

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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.