Is Toubujyuhan Co.,Ltd.'s (TYO:3297) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

ToubujyuhanLtd (TYO:3297) has had a great run on the share market with its stock up by a significant 14% over the last 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. Specifically, we decided to study ToubujyuhanLtd's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for ToubujyuhanLtd

How Is ROE Calculated?

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 ToubujyuhanLtd is:

11% = JP¥355m ÷ JP¥3.3b (Based on the trailing twelve months to November 2020).

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 ¥0.11 in profit.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

ToubujyuhanLtd's Earnings Growth And 11% ROE

To start with, ToubujyuhanLtd's ROE looks acceptable. Even when compared to the industry average of 9.8% the company's ROE looks quite decent. However, while ToubujyuhanLtd has a pretty respectable ROE, its five year net income decline rate was 2.2% . We reckon that there could be some other factors at play here that are preventing the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

So, as a next step, we compared ToubujyuhanLtd's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 6.5% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about ToubujyuhanLtd's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is ToubujyuhanLtd Using Its Retained Earnings Effectively?

Conclusion

On the whole, we do feel that ToubujyuhanLtd has some positive attributes. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. 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. You can see the 3 risks we have identified for ToubujyuhanLtd 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. 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.
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