HIRAYAMA HOLDINGS Co.,Ltd. (TYO:7781) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

HIRAYAMA HOLDINGSLtd (TYO:7781) has had a rough three months with its share price down 5.1%. 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. Specifically, we decided to study HIRAYAMA HOLDINGSLtd's ROE in this article.

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.

Check out our latest analysis for HIRAYAMA HOLDINGSLtd

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 HIRAYAMA HOLDINGSLtd is:

18% = JP¥527m ÷ JP¥2.9b (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. Another way to think of that is that for every ¥1 worth of equity, the company was able to earn ¥0.18 in profit.

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. 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 HIRAYAMA HOLDINGSLtd's Earnings Growth And 18% ROE

To begin with, HIRAYAMA HOLDINGSLtd seems to have a respectable ROE. On comparing with the average industry ROE of 15% the company's ROE looks pretty remarkable. Probably as a result of this, HIRAYAMA HOLDINGSLtd was able to see an impressive net income growth of 30% over the last five years. However, there could also be other causes behind this growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared HIRAYAMA HOLDINGSLtd's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 15%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is HIRAYAMA HOLDINGSLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is HIRAYAMA HOLDINGSLtd Efficiently Re-investing Its Profits?

The three-year median payout ratio for HIRAYAMA HOLDINGSLtd is 26%, which is moderately low. The company is retaining the remaining 74%. By the looks of it, the dividend is well covered and HIRAYAMA HOLDINGSLtd is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

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

Conclusion

On the whole, we feel that HIRAYAMA HOLDINGSLtd'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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. To know the 3 risks we have identified for HIRAYAMA HOLDINGSLtd visit our risks dashboard for free.

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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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