Are Robust Financials Driving The Recent Rally In NIPPON PARKING DEVELOPMENT Co.,Ltd.'s (TSE:2353) Stock?

NIPPON PARKING DEVELOPMENTLtd (TSE:2353) has had a great run on the share market with its stock up by a significant 11% over the last week. 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. Particularly, we will be paying attention to NIPPON PARKING DEVELOPMENTLtd's ROE today.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for NIPPON PARKING DEVELOPMENTLtd

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for NIPPON PARKING DEVELOPMENTLtd is:

29% = JP¥4.9b ÷ JP¥17b (Based on the trailing twelve months to April 2024).

The 'return' is the amount earned after tax 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 ¥0.29 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 NIPPON PARKING DEVELOPMENTLtd's Earnings Growth And 29% ROE

Firstly, we acknowledge that NIPPON PARKING DEVELOPMENTLtd has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 8.7% which is quite remarkable. This probably laid the groundwork for NIPPON PARKING DEVELOPMENTLtd's moderate 18% net income growth seen over the past five years.

We then compared NIPPON PARKING DEVELOPMENTLtd'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 13% in the same 5-year 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. Is NIPPON PARKING DEVELOPMENTLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is NIPPON PARKING DEVELOPMENTLtd Making Efficient Use Of Its Profits?

NIPPON PARKING DEVELOPMENTLtd has a healthy combination of a moderate three-year median payout ratio of 42% (or a retention ratio of 58%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, NIPPON PARKING DEVELOPMENTLtd 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

Overall, we are quite pleased with NIPPON PARKING DEVELOPMENTLtd'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. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. To know the 1 risk we have identified for NIPPON PARKING DEVELOPMENTLtd visit our risks dashboard for free.

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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.