Ohki Healthcare Holdings Co.,Ltd.'s (TYO:3417) Stock Been Rising: Are Strong Financials Guiding The Market?

Ohki Healthcare HoldingsLtd's (TYO:3417) stock is up by 3.4% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Ohki Healthcare HoldingsLtd's ROE today.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Ohki Healthcare HoldingsLtd

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 Ohki Healthcare HoldingsLtd is:

15% = JP¥3.3b ÷ JP¥21b (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.15 in profit.

What Is The Relationship Between ROE And 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 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.

A Side By Side comparison of Ohki Healthcare HoldingsLtd's Earnings Growth And 15% ROE

To start with, Ohki Healthcare HoldingsLtd's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 9.5%. This probably laid the ground for Ohki Healthcare HoldingsLtd's significant 27% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Ohki Healthcare HoldingsLtd's growth is quite high when compared to the industry average growth of 8.5% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. Is Ohki Healthcare HoldingsLtd fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Ohki Healthcare HoldingsLtd Efficiently Re-investing Its Profits?

Ohki Healthcare HoldingsLtd's ' three-year median payout ratio is on the lower side at 11% implying that it is retaining a higher percentage (89%) of its profits. So it looks like Ohki Healthcare HoldingsLtd is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Moreover, Ohki Healthcare HoldingsLtd is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

Overall, we are quite pleased with Ohki Healthcare HoldingsLtd's performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Ohki Healthcare HoldingsLtd.

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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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