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Odawara Engineering (TYO:6149) has had a rough three months with its share price down 12%. It seems that the market might have completely ignored the positive aspects of the company’s fundamentals and decided to weigh-in more on the negative aspects. Fundamentals usually dictate market outcomes so it makes sense to study the company’s financials. In this article, we decided to focus on Odawara Engineering’s 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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.
See our latest analysis for Odawara Engineering
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 Odawara Engineering is:
3.4% = JP¥451m ÷ JP¥13b (Based on the trailing twelve months to December 2020).
The ‘return’ is the income the business earned over the last year. That means that for every ¥1 worth of shareholders’ equity, the company generated ¥0.03 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. 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 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.
Odawara Engineering’s Earnings Growth And 3.4% ROE
At first glance, Odawara Engineering’s ROE doesn’t look very promising. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 5.9% either. Therefore, Odawara Engineering’s flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.
As a next step, we compared Odawara Engineering’s net income growth with the industry and discovered that the industry saw an average growth of 2.6% in the same period.
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. If you’re wondering about Odawara Engineering’s’s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is Odawara Engineering Efficiently Re-investing Its Profits?
Odawara Engineering’s low three-year median payout ratio of 9.9%, (meaning the company retains90% of profits) should mean that the company is retaining most of its earnings and consequently, should see higher growth than it has reported.
Additionally, Odawara Engineering has paid dividends over a period of at least ten years, which means that the company’s management is determined to pay dividends even if it means little to no earnings growth.
Conclusion
Overall, we have mixed feelings about Odawara Engineering. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. That being so, the latest industry analyst forecasts show that the analysts are expecting to see a huge improvement in the company’s earnings growth rate. 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.
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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
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