Is Nippon Kodoshi Corporation's (TYO:3891) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Nippon Kodoshi (TYO:3891) has had a great run on the share market with its stock up by a significant 60% over the last 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. Particularly, we will be paying attention to Nippon Kodoshi's ROE today.

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.

See our latest analysis for Nippon Kodoshi

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 Nippon Kodoshi is:

7.4% = JP¥1.1b ÷ JP¥15b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every ¥1 of its shareholder's investments, the company generates a profit of ¥0.07.

What Has ROE Got To Do With 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. 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.

Nippon Kodoshi's Earnings Growth And 7.4% ROE

On the face of it, Nippon Kodoshi's ROE is not much to talk about. However, the fact that the company's ROE is higher than the average industry ROE of 5.9%, is definitely interesting. Particularly, the substantial 44% net income growth seen by Nippon Kodoshi over the past five years is impressive . Bear in mind, the company does have a moderately low ROE. It is just that the industry ROE is lower. Hence, there might be some other aspects that are causing earnings to grow. E.g the company has a low payout ratio or could belong to a high growth industry.

Next, on comparing with the industry net income growth, we found that Nippon Kodoshi's growth is quite high when compared to the industry average growth of 7.8% in the same period, which is great to see.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about Nippon Kodoshi's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Nippon Kodoshi Efficiently Re-investing Its Profits?

The three-year median payout ratio for Nippon Kodoshi is 26%, which is moderately low. The company is retaining the remaining 74%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Nippon Kodoshi is reinvesting its earnings efficiently.

Moreover, Nippon Kodoshi is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Conclusion

Overall, we are quite pleased with Nippon Kodoshi's performance. In particular, it's great to see that the company has seen significant growth in its earnings backed by a respectable ROE and a high reinvestment rate. 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. 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.
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