HABA Laboratories,Inc.'s (TYO:4925) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?

It is hard to get excited after looking at HABA LaboratoriesInc's (TYO:4925) recent performance, when its stock has declined 6.9% over the past three months. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to HABA LaboratoriesInc'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for HABA LaboratoriesInc

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for HABA LaboratoriesInc is:

1.3% = JP¥156m ÷ JP¥12b (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 ¥0.01 in profit.

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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of HABA LaboratoriesInc's Earnings Growth And 1.3% ROE

It is quite clear that HABA LaboratoriesInc's ROE is rather low. Even compared to the average industry ROE of 11%, the company's ROE is quite dismal. HABA LaboratoriesInc was still able to see a decent net income growth of 9.6% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

Next, on comparing with the industry net income growth, we found that HABA LaboratoriesInc's growth is quite high when compared to the industry average growth of 7.0% in the same period, which is great 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. If you're wondering about HABA LaboratoriesInc's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is HABA LaboratoriesInc Making Efficient Use Of Its Profits?

In HABA LaboratoriesInc's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 7.5% (or a retention ratio of 92%), which suggests that the company is investing most of its profits to grow its business.

Besides, HABA LaboratoriesInc has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we feel that HABA LaboratoriesInc 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. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 1 risk we have identified for HABA LaboratoriesInc by visiting our risks dashboard for free on our platform here.

If you’re looking to trade HABA LaboratoriesInc, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.