Kusuri No Aoki Holdings Co., Ltd.'s (TSE:3549) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

Kusuri No Aoki Holdings (TSE:3549) has had a rough month with its share price down 3.6%. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. In this article, we decided to focus on Kusuri No Aoki Holdings' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Kusuri No Aoki Holdings

How Do You 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 Kusuri No Aoki Holdings is:

10% = JP¥13b ÷ JP¥122b (Based on the trailing twelve months to August 2024).

The 'return' is the income the business earned over the last year. So, this means that for every ¥1 of its shareholder's investments, the company generates a profit of ¥0.10.

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.

Kusuri No Aoki Holdings' Earnings Growth And 10% ROE

To begin with, Kusuri No Aoki Holdings seems to have a respectable ROE. Further, the company's ROE is similar to the industry average of 9.2%. Given the circumstances, we can't help but wonder why Kusuri No Aoki Holdings saw little to no growth in the past five years. So, there could be some other aspects that could potentially be preventing the company from growing. These include low earnings retention or poor allocation of capital.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 9.5% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. Has the market priced in the future outlook for 3549? You can find out in our latest intrinsic value infographic research report.

Is Kusuri No Aoki Holdings Efficiently Re-investing Its Profits?

Kusuri No Aoki Holdings has a low three-year median payout ratio of 7.6% (or a retention ratio of 92%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

In addition, Kusuri No Aoki Holdings has been paying dividends over a period of seven years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

On the whole, we do feel that Kusuri No Aoki Holdings has some positive attributes. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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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.