Are Strong Financial Prospects The Force That Is Driving The Momentum In Japan Elevator Service Holdings Co.,Ltd.'s TSE:6544) Stock?

Japan Elevator Service HoldingsLtd (TSE:6544) has had a great run on the share market with its stock up by a significant 6.6% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Japan Elevator Service HoldingsLtd's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Japan Elevator Service HoldingsLtd

How Is ROE Calculated?

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 Japan Elevator Service HoldingsLtd is:

31% = JP¥5.0b ÷ JP¥16b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each ¥1 of shareholders' capital it has, the company made ¥0.31 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Japan Elevator Service HoldingsLtd's Earnings Growth And 31% ROE

To begin with, Japan Elevator Service HoldingsLtd has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 8.6% which is quite remarkable. As a result, Japan Elevator Service HoldingsLtd's exceptional 22% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Japan Elevator Service 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 13%.

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). Doing so will help them establish if the stock's future looks promising or ominous. What is 6544 worth today? The intrinsic value infographic in our free research report helps visualize whether 6544 is currently mispriced by the market.

Is Japan Elevator Service HoldingsLtd Using Its Retained Earnings Effectively?

Japan Elevator Service HoldingsLtd's three-year median payout ratio is a pretty moderate 44%, meaning the company retains 56% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Japan Elevator Service HoldingsLtd is reinvesting its earnings efficiently.

Moreover, Japan Elevator Service HoldingsLtd is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.

Conclusion

On the whole, we feel that Japan Elevator Service HoldingsLtd's performance has been quite good. 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. On studying current analyst estimates, we found that analysts expect the company to continue its recent growth streak. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.