Will Weakness in Tokyo Ohka Kogyo Co., Ltd.'s (TSE:4186) Stock Prove Temporary Given Strong Fundamentals?

Tokyo Ohka Kogyo (TSE:4186) has had a rough month with its share price down 8.5%. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Tokyo Ohka Kogyo'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

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How Is ROE Calculated?

ROE 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 Tokyo Ohka Kogyo is:

13% = JP¥27b ÷ JP¥213b (Based on the trailing twelve months to December 2024).

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 ¥0.13 in profit.

See our latest analysis for Tokyo Ohka Kogyo

Why Is ROE Important For 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. 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.

Tokyo Ohka Kogyo's Earnings Growth And 13% ROE

At first glance, Tokyo Ohka Kogyo seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 7.2%. This probably laid the ground for Tokyo Ohka Kogyo's moderate 17% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Tokyo Ohka Kogyo's growth is quite high when compared to the industry average growth of 9.3% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Tokyo Ohka Kogyo's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Tokyo Ohka Kogyo Making Efficient Use Of Its Profits?

Tokyo Ohka Kogyo has a three-year median payout ratio of 36%, which implies that it retains the remaining 64% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, Tokyo Ohka Kogyo has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

On the whole, we feel that Tokyo Ohka Kogyo's performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. 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.