Is Taiyo Holdings Co., Ltd.'s (TSE:4626) Recent Stock Performance Tethered To Its Strong Fundamentals?

Simply Wall St · 08/30 21:20

Most readers would already be aware that Taiyo Holdings' (TSE:4626) stock increased significantly by 15% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Specifically, we decided to study Taiyo Holdings' ROE in this article.

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. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Taiyo Holdings

How To Calculate Return On Equity?

Return on equity 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 Taiyo Holdings is:

10% = JP¥11b ÷ JP¥105b (Based on the trailing twelve months to June 2024).

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 ¥0.10 in profit.

Why Is ROE Important For Earnings Growth?

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

A Side By Side comparison of Taiyo Holdings' Earnings Growth And 10% ROE

At first glance, Taiyo Holdings seems to have a decent ROE. Especially when compared to the industry average of 7.0% the company's ROE looks pretty impressive. This probably laid the ground for Taiyo Holdings' moderate 18% net income growth seen over the past five years.

We then compared Taiyo Holdings' 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 7.5% in the same 5-year period.

past-earnings-growth
TSE:4626 Past Earnings Growth August 30th 2024

Earnings growth is a huge factor in stock valuation. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 4626 worth today? The intrinsic value infographic in our free research report helps visualize whether 4626 is currently mispriced by the market.

Is Taiyo Holdings Efficiently Re-investing Its Profits?

With a three-year median payout ratio of 36% (implying that the company retains 64% of its profits), it seems that Taiyo Holdings is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Besides, Taiyo Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Taiyo Holdings' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. We also studied the latest analyst forecasts and found that the company's earnings growth is expected be similar to its current growth rate. 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.