As most readers will already know, Star Asia Investment's (TSE:3468) share price has risen significantly by 5.9% over the past week. However, in this article we have decided to focus on the company's weak fundamentals since it is the long term financial performance of a company that ultimately determines market outcomes. In this article, we have decided to focus on Star Asia Investment's ROE.
Return on equity (ROE) is a key indicator used to assess how efficiently a company's management is utilizing its capital. Simply put, ROE tells you the profit each dollar of shareholder investment generates.
Check out our latest analysis for Star Asia Investment
How to Calculate Return on Equity?
The formula for calculating ROE is as follows:
Return on Equity = Net Income (from continuing operations) / Shareholders' Equity
So, based on the above formula, Star Asia Investment's ROE is:
5.5% = JPY 7.1 billion / JPY 127 billion (Based on the trailing twelve months to January 2024).
“Returns” refers to a company's profit over the past year – one way to conceptualize this is that for every yen of shareholders' capital, the company made yen/sq.
What is the relationship between ROE and earnings growth?
Thus far, we have seen that ROE is a measure of how efficiently a company generates its profits. Depending on how much a company reinvests or “retains” these profits, and how effectively it does so, we are then able to assess a company's earnings growth potential. Assuming all else remains constant, the higher the ROE and retained profits, the higher a company's growth rate will be relative to companies that don't necessarily have these characteristics.
Star Asia Investment's Revenue Growth vs. 5.5% ROE
At first glance, Star Asia Investment's ROE doesn't look very promising. However, on closer inspection, we see that the company's ROE is roughly in line with the industry average of 6.0%. However, Star Asia Investment has seen flat net profit growth over the past five years, which doesn't mean much. Remember, the company's ROE isn't all that great to begin with, so this could also be one of the reasons why the company's profit growth is flat.
Next, we compare Star Asia Investment's net profit growth with the industry and find that the company's growth rate is lower than the industry average growth rate of 4.2% over the same five-year period, which is of some concern.
TSE:3468 Past Earnings Growth August 28, 2024
Earnings growth is a big driver of stock valuation. It is important for investors to know if the market has priced in a company's expected earnings growth (or decline). This helps them determine if the stock is poised for a bright or bleak future. 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 outlook. Therefore, it may be a good idea to check whether Star Asia Investment is trading at a high or low P/E compared to the industry.
Is Star Asia Investment reinvesting its profits efficiently?
Star Asia Investment's three-year median dividend payout ratio is very high at 65% (or a retention rate of 35%), but it is not uncommon for REITs to have such high payout ratios, mainly due to statutory requirements, so this is probably why earnings are not growing.
Moreover, Star Asia Investment has been paying dividends for seven years, suggesting that continuing to pay dividends is far more important to management, even at the expense of business growth.
summary
Overall, we would think twice before deciding on any investment action regarding Star Asia Investment. The company's earnings growth is disappointing due to its low ROE and lack of significant reinvestment in the business. Therefore, when we look at the latest analyst forecasts, the company's future earnings growth is expected to slow. Are these analyst forecasts based on the overall industry forecasts or on the company's fundamentals? Click here to go to the company's analyst forecasts page.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
