Koei Tecmo Holdings Co., Ltd. (TSE:3635) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap?

With its stock down 18% over the past three months, it is easy to disregard Koei Tecmo Holdings (TSE:3635). But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. Particularly, we will be paying attention to Koei Tecmo Holdings' ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Koei Tecmo Holdings

How Do You 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 Koei Tecmo Holdings is:

26% = JP¥42b ÷ JP¥158b (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. So, this means that for every ¥1 of its shareholder's investments, the company generates a profit of ¥0.26.

What Has ROE Got To Do With 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. 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 Koei Tecmo Holdings' Earnings Growth And 26% ROE

To begin with, Koei Tecmo Holdings has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 9.0% which is quite remarkable. This probably laid the groundwork for Koei Tecmo Holdings' moderate 20% net income growth seen over the past five years.

We then performed a comparison between Koei Tecmo Holdings' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 18% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is 3635 worth today? The intrinsic value infographic in our free research report helps visualize whether 3635 is currently mispriced by the market.

Is Koei Tecmo Holdings Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 46% (implying that the company retains 54% of its profits), it seems that Koei Tecmo Holdings is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Koei Tecmo Holdings 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 are quite pleased with Koei Tecmo Holdings' performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.