Are Robust Financials Driving The Recent Rally In SEIKOH GIKEN Co., Ltd.'s (TSE:6834) Stock?

SEIKOH GIKEN's (TSE:6834) stock is up by a considerable 25% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on SEIKOH GIKEN's ROE.

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.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

How To 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 SEIKOH GIKEN is:

12% = JP¥3.7b ÷ JP¥30b (Based on the trailing twelve months to September 2025).

The 'return' is the income the business earned over the last year. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.12 in profit.

See our latest analysis for SEIKOH GIKEN

What Is The Relationship Between ROE And 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of SEIKOH GIKEN's Earnings Growth And 12% ROE

To begin with, SEIKOH GIKEN seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 8.4%. This probably laid the ground for SEIKOH GIKEN's significant 22% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared SEIKOH GIKEN'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 13% in the same 5-year period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if SEIKOH GIKEN is trading on a high P/E or a low P/E, relative to its industry.

Is SEIKOH GIKEN Efficiently Re-investing Its Profits?

The three-year median payout ratio for SEIKOH GIKEN is 27%, which is moderately low. The company is retaining the remaining 73%. By the looks of it, the dividend is well covered and SEIKOH GIKEN is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

Moreover, SEIKOH GIKEN 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 SEIKOH GIKEN'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. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.