Is Hennge K.K.'s (TSE:4475) Latest Stock Performance A Reflection Of Its Financial Health?

Hennge K.K's (TSE:4475) stock is up by a considerable 43% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Hennge K.K's ROE.

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.

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How Do You 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 Hennge K.K is:

30% = JP¥977m ÷ JP¥3.3b (Based on the trailing twelve months to December 2024).

The 'return' is the yearly profit. One way to conceptualize this is that for each ¥1 of shareholders' capital it has, the company made ¥0.30 in profit.

View our latest analysis for Hennge K.K

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 Hennge K.K's Earnings Growth And 30% ROE

Firstly, we acknowledge that Hennge K.K has a significantly high ROE. Secondly, even when compared to the industry average of 14% the company's ROE is quite impressive. So, the substantial 29% net income growth seen by Hennge K.K over the past five years isn't overly surprising.

We then compared Hennge K.K'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 14% in the same 5-year period.

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Hennge K.K's's valuation, check out this gauge of its price-to-earnings ratio , as compared to its industry.

Is Hennge K.K Efficiently Re-investing Its Profits?

Hennge K.K's three-year median payout ratio to shareholders is 11%, which is quite low. This implies that the company is retaining 89% of its profits. So it looks like Hennge K.K is reinvesting profits heavily to grow its business, which shows in its earnings growth.

Conclusion

On the whole, we feel that Hennge K.K's performance has been quite good. 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. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. Our risks dashboard will have the 1 risk we have identified for Hennge K.K.

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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.