Is GMO TECH, Inc.'s (TSE:6026) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

GMO TECH's (TSE:6026) stock is up by a considerable 29% 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. Particularly, we will be paying attention to GMO TECH's ROE today.

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.

We've discovered 3 warning signs about GMO TECH. View them for free.

How Is ROE Calculated?

Return on equity 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 TECH is:

55% = JP¥669m ÷ JP¥1.2b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ¥1 worth of equity, the company was able to earn ¥0.55 in profit.

Check out our latest analysis for GMO TECH

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 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 TECH's Earnings Growth And 55% ROE

To begin with, GMO TECH has a pretty high ROE which is interesting. Second, a comparison with the average ROE reported by the industry of 7.5% also doesn't go unnoticed by us. As a result, GMO TECH's exceptional 75% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that GMO TECH's growth is quite high when compared to the industry average growth of 9.4% in the same period, which is great to see.

Earnings growth is a huge factor in stock valuation. 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. Is GMO TECH fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is GMO TECH Efficiently Re-investing Its Profits?

GMO TECH's three-year median payout ratio is a pretty moderate 41%, meaning the company retains 59% of its income. By the looks of it, the dividend is well covered and GMO TECH is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Besides, GMO TECH has been paying dividends over a period of four years. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with GMO TECH'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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. To know the 3 risks we have identified for GMO TECH visit our risks dashboard for free.

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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.