Toei Animation Co.,Ltd.'s (TSE:4816) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 7.3% over the past three months, it is easy to disregard Toei AnimationLtd (TSE:4816). 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 Toei AnimationLtd's ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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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 Toei AnimationLtd is:

16% = JP¥24b ÷ JP¥150b (Based on the trailing twelve months to June 2025).

The 'return' is the income the business earned over the last year. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.16 in profit.

See our latest analysis for Toei AnimationLtd

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. 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.

Toei AnimationLtd's Earnings Growth And 16% ROE

To begin with, Toei AnimationLtd seems to have a respectable ROE. On comparing with the average industry ROE of 9.8% the company's ROE looks pretty remarkable. This certainly adds some context to Toei AnimationLtd's decent 17% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Toei AnimationLtd's growth is quite high when compared to the industry average growth of 5.1% in the same period, which is great to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Toei AnimationLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Toei AnimationLtd Efficiently Re-investing Its Profits?

Toei AnimationLtd has a healthy combination of a moderate three-year median payout ratio of 31% (or a retention ratio of 69%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

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

Conclusion

Overall, we are quite pleased with Toei AnimationLtd's 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. 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.