Are Strong Financial Prospects The Force That Is Driving The Momentum In Chugoku Marine Paints, Ltd.'s TSE:4617) Stock?

Chugoku Marine Paints' (TSE:4617) stock is up by a considerable 44% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Chugoku Marine Paints' ROE in this article.

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.

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How To Calculate Return On Equity?

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 Chugoku Marine Paints is:

15% = JP¥13b ÷ JP¥86b (Based on the trailing twelve months to June 2025).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every ¥1 worth of equity, the company was able to earn ¥0.15 in profit.

Check out our latest analysis for Chugoku Marine Paints

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Chugoku Marine Paints' Earnings Growth And 15% ROE

To begin with, Chugoku Marine Paints seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 6.9%. This certainly adds some context to Chugoku Marine Paints' exceptional 52% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Chugoku Marine Paints' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 7.5%.

Earnings growth is an important metric to consider when valuing a stock. 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 Chugoku Marine Paints''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Chugoku Marine Paints Using Its Retained Earnings Effectively?

Chugoku Marine Paints has a three-year median payout ratio of 31% (where it is retaining 69% of its income) which is not too low or not too high. So it seems that Chugoku Marine Paints is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Additionally, Chugoku Marine Paints 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.

Conclusion

On the whole, we feel that Chugoku Marine Paints' performance has been quite good. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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 company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.