Are Robust Financials Driving The Recent Rally In Genky DrugStores Co., Ltd.'s (TSE:9267) Stock?

Genky DrugStores (TSE:9267) has had a great run on the share market with its stock up by a significant 25% over the last three months. 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. Specifically, we decided to study Genky DrugStores' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Genky DrugStores

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 Genky DrugStores is:

14% = JP¥6.3b ÷ JP¥47b (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 ¥0.14 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.

Genky DrugStores' Earnings Growth And 14% ROE

To begin with, Genky DrugStores seems to have a respectable ROE. On comparing with the average industry ROE of 9.3% the company's ROE looks pretty remarkable. This probably laid the ground for Genky DrugStores' moderate 16% net income growth seen over the past five years.

We then compared Genky DrugStores' 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 10% in the same 5-year period.

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. Is Genky DrugStores fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Genky DrugStores Efficiently Re-investing Its Profits?

In Genky DrugStores' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 8.0% (or a retention ratio of 92%), which suggests that the company is investing most of its profits to grow its business.

Additionally, Genky DrugStores has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with Genky DrugStores' 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. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.