Are Hoden Seimitsu Kako Kenkyusho Co., Ltd.'s (TSE:6469) Fundamentals Good Enough to Warrant Buying Given The Stock's Recent Weakness?

It is hard to get excited after looking at Hoden Seimitsu Kako Kenkyusho's (TSE:6469) recent performance, when its stock has declined 18% over the past month. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Hoden Seimitsu Kako Kenkyusho's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Hoden Seimitsu Kako Kenkyusho

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 Hoden Seimitsu Kako Kenkyusho is:

3.7% = JP¥270m ÷ JP¥7.2b (Based on the trailing twelve months to May 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ¥1 worth of equity, the company was able to earn ¥0.04 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Hoden Seimitsu Kako Kenkyusho's Earnings Growth And 3.7% ROE

When you first look at it, Hoden Seimitsu Kako Kenkyusho's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 7.3%, the company's ROE leaves us feeling even less enthusiastic. Although, we can see that Hoden Seimitsu Kako Kenkyusho saw a modest net income growth of 6.6% over the past five years. So, the growth in the company's earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Hoden Seimitsu Kako Kenkyusho's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 8.6% in the same period.

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 Hoden Seimitsu Kako Kenkyusho's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hoden Seimitsu Kako Kenkyusho Efficiently Re-investing Its Profits?

In Hoden Seimitsu Kako Kenkyusho's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 11% (or a retention ratio of 89%), which suggests that the company is investing most of its profits to grow its business.

Moreover, Hoden Seimitsu Kako Kenkyusho is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

On the whole, we do feel that Hoden Seimitsu Kako Kenkyusho has some positive attributes. Specifically, its fairly high earnings growth number, which no doubt was backed by the company's high earnings retention. Still, the low ROE means that all that reinvestment is not reaping a lot of benefit to the investors. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for Hoden Seimitsu Kako Kenkyusho.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com