Could The Market Be Wrong About Tsurumi Manufacturing Co.,Ltd. (TSE:6351) Given Its Attractive Financial Prospects?

Tsurumi ManufacturingLtd (TSE:6351) has had a rough week with its share price down 8.1%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Tsurumi ManufacturingLtd's ROE.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Tsurumi ManufacturingLtd

How To 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 Tsurumi ManufacturingLtd is:

9.0% = JP¥8.5b ÷ JP¥94b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.09 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. 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. 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.

Tsurumi ManufacturingLtd's Earnings Growth And 9.0% ROE

At first glance, Tsurumi ManufacturingLtd seems to have a decent ROE. Especially when compared to the industry average of 7.3% the company's ROE looks pretty impressive. This probably laid the ground for Tsurumi ManufacturingLtd's moderate 18% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Tsurumi ManufacturingLtd's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Tsurumi ManufacturingLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tsurumi ManufacturingLtd Using Its Retained Earnings Effectively?

Tsurumi ManufacturingLtd's three-year median payout ratio to shareholders is 16% (implying that it retains 84% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, Tsurumi ManufacturingLtd has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with Tsurumi ManufacturingLtd'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.

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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.