Is Japan Aviation Electronics Industry, Limited's (TSE:6807) Stock's Recent Performance A Reflection Of Its Financial Health?

Simply Wall St · 08/30 23:39

Japan Aviation Electronics Industry's (TSE:6807) stock is up by 6.5% over the past three months. Since the market usually pay for a company’s long-term financial health, we decided to study the company’s fundamentals to see if they could be influencing the market. Specifically, we decided to study Japan Aviation Electronics Industry's 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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Japan Aviation Electronics Industry

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Japan Aviation Electronics Industry is:

9.8% = JP¥13b ÷ JP¥131b (Based on the trailing twelve months to June 2024).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ¥1 of shareholders' capital it has, the company made ¥0.10 in profit.

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. 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.

Japan Aviation Electronics Industry's Earnings Growth And 9.8% ROE

To begin with, Japan Aviation Electronics Industry seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 8.4%. This certainly adds some context to Japan Aviation Electronics Industry's moderate 8.9% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Japan Aviation Electronics Industry's reported growth was lower than the industry growth of 16% over the last few years, which is not something we like to see.

past-earnings-growth
TSE:6807 Past Earnings Growth August 30th 2024

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. This then helps them determine if the stock is placed for a bright or bleak future. Is 6807 fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Japan Aviation Electronics Industry Using Its Retained Earnings Effectively?

Japan Aviation Electronics Industry's three-year median payout ratio to shareholders is 24% (implying that it retains 76% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Moreover, Japan Aviation Electronics Industry 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 Japan Aviation Electronics Industry's 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 a good amount of 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. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.