Does The Market Have A Low Tolerance For NH Foods Ltd.'s (TSE:2282) Mixed Fundamentals?
It is hard to get excited after looking at NH Foods' (TSE:2282) recent performance, when its stock has declined 7.9% over the past three months. 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 NH Foods' ROE in this article.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.
How Is ROE Calculated?
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 NH Foods is:
5.2% = JP¥28b ÷ JP¥537b (Based on the trailing twelve months to March 2025).
The 'return' is the income the business earned over the last year. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.05 in profit.
See our latest analysis for NH Foods
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 NH Foods' Earnings Growth And 5.2% ROE
At first glance, NH Foods' ROE doesn't look very promising. Next, when compared to the average industry ROE of 7.2%, the company's ROE leaves us feeling even less enthusiastic. Hence, the flat earnings seen by NH Foods over the past five years could probably be the result of it having a lower ROE.
We then compared NH Foods' net income growth with the industry and found that the average industry growth rate was 8.5% in the same 5-year period.
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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about NH Foods''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is NH Foods Using Its Retained Earnings Effectively?
Despite having a moderate three-year median payout ratio of 44% (meaning the company retains56% of profits) in the last three-year period, NH Foods' earnings growth was more or les flat. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Moreover, NH Foods has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Conclusion
In total, we're a bit ambivalent about NH Foods' performance. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. 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.