Nishimatsuya Chain Co., Ltd.'s (TSE:7545) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

With its stock down 9.9% over the past month, it is easy to disregard Nishimatsuya Chain (TSE:7545). However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Nishimatsuya Chain's ROE.

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.

View our latest analysis for Nishimatsuya Chain

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 Nishimatsuya Chain is:

9.2% = JP¥8.2b ÷ JP¥89b (Based on the trailing twelve months to August 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 ¥0.09.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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 Nishimatsuya Chain's Earnings Growth And 9.2% ROE

At first glance, Nishimatsuya Chain seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 9.7%. This certainly adds some context to Nishimatsuya Chain's moderate 20% net income growth seen over the past five years.

As a next step, we compared Nishimatsuya Chain'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 13%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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. Has the market priced in the future outlook for 7545? You can find out in our latest intrinsic value infographic research report.

Is Nishimatsuya Chain Efficiently Re-investing Its Profits?

Summary

Overall, we are quite pleased with Nishimatsuya Chain's performance. 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 substantial growth in its earnings. That being so, a study of the latest analyst forecasts show that the company is expected to see a slowdown in its future earnings growth. 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.