HIRAYAMA HOLDINGS Co.,Ltd.'s (TYO:7781) Stock Is Going Strong: Is the Market Following Fundamentals?

Most readers would already be aware that HIRAYAMA HOLDINGSLtd's (TYO:7781) stock increased significantly by 7.7% over the past month. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on HIRAYAMA HOLDINGSLtd's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for HIRAYAMA HOLDINGSLtd

How Is ROE Calculated?

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:

11% = JP¥322m ÷ JP¥2.8b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every ¥1 worth of equity, the company was able to earn ¥0.11 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

HIRAYAMA HOLDINGSLtd's Earnings Growth And 11% ROE

To begin with, HIRAYAMA HOLDINGSLtd seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 14%. Consequently, this likely laid the ground for the impressive net income growth of 28% seen over the past five years by HIRAYAMA HOLDINGSLtd. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

We then compared HIRAYAMA HOLDINGSLtd's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 15% in the same period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. 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 HIRAYAMA HOLDINGSLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is HIRAYAMA HOLDINGSLtd Making Efficient Use Of Its Profits?

HIRAYAMA HOLDINGSLtd has a three-year median payout ratio of 26% (where it is retaining 74% of its income) which is not too low or not too high. 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.

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

Summary

Overall, we are quite pleased with HIRAYAMA HOLDINGSLtd's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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 3 risks we have identified for HIRAYAMA HOLDINGSLtd 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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