Has KOIKE-YA Inc. (TYO:2226) Stock's Recent Performance Got Anything to Do With Its Financial Health?

KOIKE-YA's (TYO:2226) stock is up by 7.4% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to investigate if the company's decent financials had a hand to play in the recent price move. Particularly, we will be paying attention to KOIKE-YA'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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for KOIKE-YA

How To 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 KOIKE-YA is:

7.6% = JP¥963m ÷ JP¥13b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every ¥1 of its shareholder's investments, the company generates a profit of ¥0.08.

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. 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.

KOIKE-YA's Earnings Growth And 7.6% ROE

On the face of it, KOIKE-YA's ROE is not much to talk about. Yet, a closer study shows that the company's ROE is similar to the industry average of 6.5%. Particularly, the exceptional 26% net income growth seen by KOIKE-YA over the past five years is pretty remarkable. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings 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.

We then compared KOIKE-YA'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 4.9% in the same 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 KOIKE-YA fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is KOIKE-YA Making Efficient Use Of Its Profits?

The three-year median payout ratio for KOIKE-YA is 49%, which is moderately low. The company is retaining the remaining 51%. By the looks of it, the dividend is well covered and KOIKE-YA is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Additionally, KOIKE-YA 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 feel that KOIKE-YA certainly does have some positive factors to consider. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings.

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This article by Simply Wall St is general in nature. 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.
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