Shinobu Foods Products Co., Ltd.'s (TSE:2903) Stock Is Rallying But Financials Look Ambiguous: Will The Momentum Continue?

Simply Wall St · 6d ago

Most readers would already be aware that Shinobu Foods Products' (TSE:2903) stock increased significantly by 31% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. In this article, we decided to focus on Shinobu Foods Products' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. 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?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Shinobu Foods Products is:

6.6% = JP¥998m ÷ JP¥15b (Based on the trailing twelve months to March 2025).

The 'return' is the yearly profit. Another way to think of that is that for every ¥1 worth of equity, the company was able to earn ¥0.07 in profit.

Check out our latest analysis for Shinobu Foods Products

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

Shinobu Foods Products' Earnings Growth And 6.6% ROE

When you first look at it, Shinobu Foods Products' ROE doesn't look that attractive. However, its ROE is similar to the industry average of 7.2%, so we won't completely dismiss the company. Still, Shinobu Foods Products has seen a flat net income growth over the past five years. Bear in mind, the company's ROE is not very high. Hence, this provides some context to the flat earnings growth seen by the company.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by 8.3% over the last few years.

past-earnings-growth
TSE:2903 Past Earnings Growth June 10th 2025

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. If you're wondering about Shinobu Foods Products''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Shinobu Foods Products Efficiently Re-investing Its Profits?

Despite having a moderate three-year median payout ratio of 29% (meaning the company retains71% of profits) in the last three-year period, Shinobu Foods Products' earnings growth was more or les flat. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

In addition, Shinobu Foods Products has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Conclusion

On the whole, we feel that the performance shown by Shinobu Foods Products can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. So far, we've only made a quick discussion around the company's earnings growth. So it may be worth checking this free detailed graph of Shinobu Foods Products' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.