Could The Market Be Wrong About UNIVERSAL ENGEISHA Co., Ltd. (TSE:6061) Given Its Attractive Financial Prospects?

It is hard to get excited after looking at UNIVERSAL ENGEISHA's (TSE:6061) recent performance, when its stock has declined 13% over the past week. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. 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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for UNIVERSAL ENGEISHA

How Do You Calculate Return On Equity?

ROE 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 UNIVERSAL ENGEISHA is:

14% = JP¥1.7b ÷ JP¥12b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.14 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. 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. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of UNIVERSAL ENGEISHA's Earnings Growth And 14% ROE

To begin with, UNIVERSAL ENGEISHA seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.6%. This probably laid the ground for UNIVERSAL ENGEISHA's significant 23% net income growth seen over the past five years. However, there could also be other causes behind this growth. 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.

As a next step, we compared UNIVERSAL ENGEISHA'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 12%.

Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if UNIVERSAL ENGEISHA is trading on a high P/E or a low P/E, relative to its industry.

Is UNIVERSAL ENGEISHA Using Its Retained Earnings Effectively?

UNIVERSAL ENGEISHA's three-year median payout ratio to shareholders is 8.1%, which is quite low. This implies that the company is retaining 92% of its profits. So it looks like UNIVERSAL ENGEISHA is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, UNIVERSAL ENGEISHA 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.

Conclusion

On the whole, we feel that UNIVERSAL ENGEISHA's performance has been quite good. 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.

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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.