Is SHOBIDO Corporation's (TSE:7819) Latest Stock Performance A Reflection Of Its Financial Health?

Simply Wall St · 04/15 05:15

SHOBIDO (TSE:7819) has had a great run on the share market with its stock up by a significant 13% over the last week. 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 SHOBIDO'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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

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 SHOBIDO is:

11% = JP¥790m ÷ JP¥7.1b (Based on the trailing twelve months to December 2024).

The 'return' refers to a company's earnings over the last year. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.11 in profit.

See our latest analysis for SHOBIDO

What Is The Relationship Between ROE And 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. 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.

SHOBIDO's Earnings Growth And 11% ROE

To start with, SHOBIDO's ROE looks acceptable. On comparing with the average industry ROE of 7.3% the company's ROE looks pretty remarkable. Probably as a result of this, SHOBIDO was able to see an impressive net income growth of 36% over the last five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared SHOBIDO's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 4.0%.

past-earnings-growth
TSE:7819 Past Earnings Growth April 15th 2025

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if SHOBIDO is trading on a high P/E or a low P/E, relative to its industry.

Is SHOBIDO Using Its Retained Earnings Effectively?

SHOBIDO's three-year median payout ratio is a pretty moderate 37%, meaning the company retains 63% of its income. So it seems that SHOBIDO is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

Moreover, SHOBIDO 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

In total, we are pretty happy with SHOBIDO's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 1 risk we have identified for SHOBIDO by visiting our risks dashboard for free on our platform here.