Do Its Financials Have Any Role To Play In Driving Japan Tobacco Inc.'s (TSE:2914) Stock Up Recently?
Japan Tobacco (TSE:2914) has had a great run on the share market with its stock up by a significant 20% over the last three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Japan Tobacco's ROE.
Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.
How Do You 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 Japan Tobacco is:
13% = JP¥540b ÷ JP¥4.2t (Based on the trailing twelve months to September 2025).
The 'return' is the yearly profit. One way to conceptualize this is that for each ¥1 of shareholders' capital it has, the company made ¥0.13 in profit.
Check out our latest analysis for Japan Tobacco
What Has ROE Got To Do With Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
Japan Tobacco's Earnings Growth And 13% ROE
At first glance, Japan Tobacco seems to have a decent ROE. Yet, the fact that the company's ROE is lower than the industry average of 18% does temper our expectations. Further, Japan Tobacco's five year net income growth of 4.7% is on the lower side. Bear in mind, the company does have a respectable level of ROE. It is just that the industry ROE is higher. So there might be other reasons for the earnings growth to be low. These include low earnings retention or poor capital allocation.
Next, on comparing Japan Tobacco's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 4.7% over the last few years.
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is 2914 worth today? The intrinsic value infographic in our free research report helps visualize whether 2914 is currently mispriced by the market.
Is Japan Tobacco Using Its Retained Earnings Effectively?
The high three-year median payout ratio of 72% (that is, the company retains only 28% of its income) over the past three years for Japan Tobacco suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.
Additionally, Japan Tobacco 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
In total, it does look like Japan Tobacco has some positive aspects to its business. While no doubt its earnings growth is pretty decent, we do feel that the reinvestment rate is pretty low. Meaning, the earnings growth number could have been significantly higher, had the company been retaining more of its profits. That being so, the latest analyst forecasts show that the company will continue to see an expansion in its earnings. 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.