Hisamitsu Pharmaceutical Co., Inc.'s (TSE:4530) Dismal Stock Performance Reflects Weak Fundamentals

It is hard to get excited after looking at Hisamitsu Pharmaceutical's (TSE:4530) recent performance, when its stock has declined 4.1% over the past month. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. Specifically, we decided to study Hisamitsu Pharmaceutical's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How To 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 Hisamitsu Pharmaceutical is:

6.1% = JP¥16b ÷ JP¥262b (Based on the trailing twelve months to November 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each ¥1 of shareholders' capital it has, the company made ¥0.06 in profit.

View our latest analysis for Hisamitsu Pharmaceutical

What Has ROE Got To Do With 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 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.

A Side By Side comparison of Hisamitsu Pharmaceutical's Earnings Growth And 6.1% ROE

At first glance, Hisamitsu Pharmaceutical's ROE doesn't look very promising. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 8.4%. Hence, the flat earnings seen by Hisamitsu Pharmaceutical over the past five years could probably be the result of it having a lower ROE.

As a next step, we compared Hisamitsu Pharmaceutical's net income growth with the industry and discovered that the industry saw an average growth of 6.9% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Hisamitsu Pharmaceutical's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hisamitsu Pharmaceutical Using Its Retained Earnings Effectively?

The high three-year median payout ratio of 52% (meaning, the company retains only 48% of profits) for Hisamitsu Pharmaceutical suggests that the company's earnings growth was miniscule as a result of paying out a majority of its earnings.

Moreover, Hisamitsu Pharmaceutical has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Summary

On the whole, Hisamitsu Pharmaceutical's performance is quite a big let-down. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company's earnings growth rate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.