Are Robust Financials Driving The Recent Rally In Kondotec Inc.'s (TSE:7438) Stock?

Simply Wall St · 04/14 23:46

Kondotec (TSE:7438) has had a great run on the share market with its stock up by a significant 12% over the last week. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Specifically, we decided to study Kondotec's ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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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 Kondotec is:

8.7% = JP¥3.3b ÷ JP¥37b (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax 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.

View our latest analysis for Kondotec

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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Kondotec's Earnings Growth And 8.7% ROE

To start with, Kondotec's ROE looks acceptable. Even when compared to the industry average of 7.5% the company's ROE looks quite decent. This certainly adds some context to Kondotec's moderate 7.1% net income growth seen over the past five years.

As a next step, we compared Kondotec's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 10% in the same period.

past-earnings-growth
TSE:7438 Past Earnings Growth April 14th 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Kondotec's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Kondotec Using Its Retained Earnings Effectively?

Kondotec has a healthy combination of a moderate three-year median payout ratio of 34% (or a retention ratio of 66%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Additionally, Kondotec has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with Kondotec's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising.