Is Treasure Factory Co.,LTD.'s (TSE:3093) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Most readers would already be aware that Treasure FactoryLTD's (TSE:3093) stock increased significantly by 14% over the past week. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Treasure FactoryLTD's ROE in this article.

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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Treasure FactoryLTD

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Treasure FactoryLTD is:

27% = JP¥2.6b ÷ JP¥9.7b (Based on the trailing twelve months to November 2024).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ¥1 of its shareholder's investments, the company generates a profit of ¥0.27.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. 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.

A Side By Side comparison of Treasure FactoryLTD's Earnings Growth And 27% ROE

To begin with, Treasure FactoryLTD has a pretty high ROE which is interesting. Additionally, the company's ROE is higher compared to the industry average of 9.4% which is quite remarkable. As a result, Treasure FactoryLTD's exceptional 49% net income growth seen over the past five years, doesn't come as a surprise.

As a next step, we compared Treasure FactoryLTD's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 11%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Is Treasure FactoryLTD fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Treasure FactoryLTD Using Its Retained Earnings Effectively?

Treasure FactoryLTD's three-year median payout ratio to shareholders is 24%, which is quite low. This implies that the company is retaining 76% of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Moreover, Treasure FactoryLTD is determined to keep sharing its profits with shareholders which we infer from its long history of nine years of paying a dividend.

Conclusion

In total, we are pretty happy with Treasure FactoryLTD's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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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.