Are Robust Financials Driving The Recent Rally In Kaori Heat Treatment Co., Ltd.'s (TWSE:8996) Stock?

Most readers would already be aware that Kaori Heat Treatment's (TWSE:8996) stock increased significantly by 56% 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 Kaori Heat Treatment's ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Kaori Heat Treatment

How Is ROE Calculated?

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 Kaori Heat Treatment is:

23% = NT$578m ÷ NT$2.6b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. One way to conceptualize this is that for each NT$1 of shareholders' capital it has, the company made NT$0.23 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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.

Kaori Heat Treatment's Earnings Growth And 23% ROE

First thing first, we like that Kaori Heat Treatment has an impressive ROE. Secondly, even when compared to the industry average of 11% the company's ROE is quite impressive. As a result, Kaori Heat Treatment's exceptional 32% net income growth seen over the past five years, doesn't come as a surprise.

We then compared Kaori Heat Treatment'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 11% 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. Has the market priced in the future outlook for 8996? You can find out in our latest intrinsic value infographic research report.

Is Kaori Heat Treatment Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 62% (implying that it keeps only 38% of profits) for Kaori Heat Treatment suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Besides, Kaori Heat Treatment has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company's future payout ratio is expected to drop to 49% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 40%, over the same period.

Summary

In total, we are pretty happy with Kaori Heat Treatment's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts 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.