Can Mixed Financials Have A Negative Impact on Hoshi Iryo-Sanki Co., Ltd.'s 's (TYO:7634) Current Price Momentum?

Hoshi Iryo-Sanki's (TYO:7634) stock up by 3.7% over the past three months. However, we decided to study the company's mixed-bag of fundamentals to assess what this could mean for future share prices, as stock prices tend to be aligned with a company's long-term financial performance. In this article, we decided to focus on Hoshi Iryo-Sanki's ROE.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Hoshi Iryo-Sanki

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 Hoshi Iryo-Sanki is:

5.8% = JP¥763m ÷ JP¥13b (Based on the trailing twelve months to December 2020).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ¥1 worth of equity, the company was able to earn ¥0.06 in profit.

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. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

Hoshi Iryo-Sanki's Earnings Growth And 5.8% ROE

On the face of it, Hoshi Iryo-Sanki's ROE is not much to talk about. Next, when compared to the average industry ROE of 8.3%, the company's ROE leaves us feeling even less enthusiastic. Therefore, Hoshi Iryo-Sanki's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Hoshi Iryo-Sanki's net income growth with the industry and discovered that the industry saw an average growth of 4.7% in the same 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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Hoshi Iryo-Sanki fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Hoshi Iryo-Sanki Efficiently Re-investing Its Profits?

Hoshi Iryo-Sanki has a low three-year median payout ratio of 16% (or a retention ratio of 84%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

In addition, Hoshi Iryo-Sanki 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.

Summary

On the whole, we feel that the performance shown by Hoshi Iryo-Sanki can be open to many interpretations. 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. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Hoshi Iryo-Sanki's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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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