GMO Research & AI, Inc.'s (TSE:3695) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

Most readers would already be aware that GMO Research & AI's (TSE:3695) stock increased significantly by 11% over the past week. However, in this article, we decided to focus on its weak fundamentals, as long-term financial performance of a business is what ultimately dictates market outcomes. In this article, we decided to focus on GMO Research & AI's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

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How Do You 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 GMO Research & AI is:

1.9% = JP¥35m ÷ JP¥1.8b (Based on the trailing twelve months to March 2025).

The 'return' is the profit over the last twelve months. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.02 in profit.

See our latest analysis for GMO Research & AI

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

GMO Research & AI's Earnings Growth And 1.9% ROE

As you can see, GMO Research & AI's ROE looks pretty weak. Even compared to the average industry ROE of 8.9%, the company's ROE is quite dismal. Hence, the flat earnings seen by GMO Research & AI over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared GMO Research & AI's net income growth with the industry and discovered that the industry saw an average growth of 8.1% in the same period.

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. 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 GMO Research & AI's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is GMO Research & AI Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 67% (meaning, the company retains only 33% of profits) for GMO Research & AI suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Additionally, GMO Research & AI has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

Overall, we would be extremely cautious before making any decision on GMO Research & AI. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of GMO Research & AI'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. 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.