Is The Market Rewarding Morinaga Milk Industry Co., Ltd. (TSE:2264) With A Negative Sentiment As A Result Of Its Mixed Fundamentals?

It is hard to get excited after looking at Morinaga Milk Industry's (TSE:2264) recent performance, when its stock has declined 7.2% over the past month. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Specifically, we decided to study Morinaga Milk Industry's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How To Calculate Return On Equity?

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 Morinaga Milk Industry is:

1.5% = JP¥4.1b ÷ JP¥268b (Based on the trailing twelve months to June 2025).

The 'return' is the profit over the last twelve months. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.02 in profit.

Check out our latest analysis for Morinaga Milk Industry

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 Morinaga Milk Industry's Earnings Growth And 1.5% ROE

It is quite clear that Morinaga Milk Industry's ROE is rather low. Even when compared to the industry average of 7.6%, the ROE figure is pretty disappointing. Hence, the flat earnings seen by Morinaga Milk Industry over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that Morinaga Milk Industry's reported growth was lower than the industry growth of 9.0% over the last few years, which is not something we like to see.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is 2264 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Morinaga Milk Industry Using Its Retained Earnings Effectively?

Morinaga Milk Industry's low three-year median payout ratio of 15%, (meaning the company retains85% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.

In addition, Morinaga Milk Industry has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

Overall, we have mixed feelings about Morinaga Milk Industry. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.