Is Kokuyo Co., Ltd.'s (TSE:7984) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Simply Wall St · 09/28 23:36

Most readers would already be aware that Kokuyo's (TSE:7984) stock increased significantly by 6.3% over the past month. 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. Particularly, we will be paying attention to Kokuyo's ROE today.

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.

See our latest analysis for Kokuyo

How Do You 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 Kokuyo is:

8.5% = JP¥23b ÷ JP¥271b (Based on the trailing twelve months to June 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each ¥1 of shareholders' capital it has, the company made ¥0.09 in profit.

What Is The Relationship Between ROE And 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. 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 Kokuyo's Earnings Growth And 8.5% ROE

At first glance, Kokuyo seems to have a decent ROE. Even when compared to the industry average of 8.7% the company's ROE looks quite decent. This probably goes some way in explaining Kokuyo's moderate 15% growth over the past five years amongst other factors.

Next, on comparing Kokuyo's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 13% over the last few years.

past-earnings-growth
TSE:7984 Past Earnings Growth September 28th 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. This then helps them determine if the stock is placed for a bright or bleak future. What is 7984 worth today? The intrinsic value infographic in our free research report helps visualize whether 7984 is currently mispriced by the market.

Is Kokuyo Making Efficient Use Of Its Profits?

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

Moreover, Kokuyo 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

On the whole, we feel that Kokuyo's performance has been quite good. 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. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.