Is UNIVERSAL ENGEISHA Co., Ltd.'s (TYO:6061) Recent Performance Tethered To Its Attractive Financial Prospects?

UNIVERSAL ENGEISHA's (TYO:6061) stock up by 1.7% over the past month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on UNIVERSAL ENGEISHA's ROE.

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

View our latest analysis for UNIVERSAL ENGEISHA

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 UNIVERSAL ENGEISHA is:

10% = JP¥791m ÷ JP¥7.7b (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.10 in profit.

What Has ROE Got To Do With 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 UNIVERSAL ENGEISHA's Earnings Growth And 10% ROE

At first glance, UNIVERSAL ENGEISHA seems to have a decent ROE. Especially when compared to the industry average of 7.5% the company's ROE looks pretty impressive. Probably as a result of this, UNIVERSAL ENGEISHA was able to see a decent growth of 6.0% over the last five years.

Next, on comparing UNIVERSAL ENGEISHA's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 6.0% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 UNIVERSAL ENGEISHA fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is UNIVERSAL ENGEISHA Making Efficient Use Of Its Profits?

UNIVERSAL ENGEISHA has a low three-year median payout ratio of 17%, meaning that the company retains the remaining 83% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, UNIVERSAL ENGEISHA has been paying dividends over a period of nine years. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

On the whole, we feel that UNIVERSAL ENGEISHA'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. 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. You can see the 1 risk we have identified for UNIVERSAL ENGEISHA by visiting our risks dashboard for free on our platform here.

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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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