Will Weakness in Treasure Factory Co.,LTD.'s (TSE:3093) Stock Prove Temporary Given Strong Fundamentals?

Treasure FactoryLTD (TSE:3093) has had a rough three months with its share price down 33%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Treasure FactoryLTD's ROE.

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.

View our latest analysis for Treasure FactoryLTD

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 Treasure FactoryLTD is:

28% = JP¥2.5b ÷ JP¥9.1b (Based on the trailing twelve months to May 2024).

The 'return' is the profit over the last twelve months. So, this means that for every ¥1 of its shareholder's investments, the company generates a profit of ¥0.28.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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 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 Treasure FactoryLTD's Earnings Growth And 28% ROE

First thing first, we like that Treasure FactoryLTD has an impressive ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. As a result, Treasure FactoryLTD's exceptional 46% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Treasure FactoryLTD's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 12% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. 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 Efficiently Re-investing Its Profits?

Treasure FactoryLTD's three-year median payout ratio is a pretty moderate 26%, meaning the company retains 74% of its income. By the looks of it, the dividend is well covered and Treasure FactoryLTD is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

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.

Summary

Overall, we are quite pleased with Treasure FactoryLTD'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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page 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.