Space Shower Skiyaki Holdings Inc.'s (TSE:4838) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Most readers would already be aware that Space Shower Skiyaki Holdings' (TSE:4838) stock increased significantly by 20% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Space Shower Skiyaki Holdings' 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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Our free stock report includes 4 warning signs investors should be aware of before investing in Space Shower Skiyaki Holdings. Read for free now.

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 Space Shower Skiyaki Holdings is:

2.4% = JP¥196m ÷ JP¥8.1b (Based on the trailing twelve months to December 2024).

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.

Check out our latest analysis for Space Shower Skiyaki Holdings

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 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.

A Side By Side comparison of Space Shower Skiyaki Holdings' Earnings Growth And 2.4% ROE

On the face of it, Space Shower Skiyaki Holdings' ROE is not much to talk about. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 7.5% either. In spite of this, Space Shower Skiyaki Holdings was able to grow its net income considerably, at a rate of 30% in the last five years. So, there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Space Shower Skiyaki Holdings' growth is quite high when compared to the industry average growth of 7.7% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Space Shower Skiyaki Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Space Shower Skiyaki Holdings Using Its Retained Earnings Effectively?

Space Shower Skiyaki Holdings has a really low three-year median payout ratio of 22%, meaning that it has the remaining 78% left over to reinvest into its business. So it looks like Space Shower Skiyaki Holdings is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Additionally, Space Shower Skiyaki Holdings 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 do feel that Space Shower Skiyaki Holdings has some positive attributes. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 4 risks we have identified for Space Shower Skiyaki Holdings visit our risks dashboard for free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.