Daimaru Enawin Co., Ltd. (TSE:9818) Stock Is Going Strong But Fundamentals Look Uncertain: What Lies Ahead ?

Most readers would already be aware that Daimaru Enawin's (TSE:9818) stock increased significantly by 14% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Particularly, we will be paying attention to Daimaru Enawin's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Daimaru Enawin

How Do You Calculate Return On Equity?

ROE can be calculated by using the formula:

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

So, based on the above formula, the ROE for Daimaru Enawin is:

6.1% = JP¥881m ÷ JP¥14b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every ¥1 worth of equity, the company was able to earn ¥0.06 in profit.

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. 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 Daimaru Enawin's Earnings Growth And 6.1% ROE

When you first look at it, Daimaru Enawin's ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 9.5%. Hence, the flat earnings seen by Daimaru Enawin over the past five years could probably be the result of it having a lower ROE.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 13% over the last few years.

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). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Daimaru Enawin's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Daimaru Enawin Using Its Retained Earnings Effectively?

Daimaru Enawin has a low three-year median payout ratio of 24% (or a retention ratio of 76%) but the negligible earnings growth number doesn't reflect this as high growth usually follows high profit retention.

In addition, Daimaru Enawin has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

On the whole, we feel that the performance shown by Daimaru Enawin can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Daimaru Enawin's past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

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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.