Is MERCURY REALTECH INNOVATOR Inc.'s (TSE:5025) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

MERCURY REALTECH INNOVATOR (TSE:5025) has had a great run on the share market with its stock up by a significant 19% over the last month. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to MERCURY REALTECH INNOVATOR'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.

See our latest analysis for MERCURY REALTECH INNOVATOR

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for MERCURY REALTECH INNOVATOR is:

18% = JP¥147m ÷ JP¥840m (Based on the trailing twelve months to November 2024).

The 'return' is the amount earned after tax over the last twelve months. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.17 in profit.

What Has ROE Got To Do With 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 MERCURY REALTECH INNOVATOR's Earnings Growth And 18% ROE

At first glance, MERCURY REALTECH INNOVATOR seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 11%. This probably laid the ground for MERCURY REALTECH INNOVATOR's moderate 5.3% net income growth seen over the past five years.

We then compared MERCURY REALTECH INNOVATOR's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 9.3% in the same 5-year period, which is a bit concerning.

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about MERCURY REALTECH INNOVATOR's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is MERCURY REALTECH INNOVATOR Efficiently Re-investing Its Profits?

Given that MERCURY REALTECH INNOVATOR doesn't pay any regular dividends to its shareholders, we infer that the company has been reinvesting all of its profits to grow its business.

Conclusion

On the whole, we feel that MERCURY REALTECH INNOVATOR's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 2 risks we have identified for MERCURY REALTECH INNOVATOR by visiting our risks dashboard for free on our platform here.

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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.