Can Mixed Fundamentals Have A Negative Impact on Zeon Corporation (TSE:4205) Current Share Price Momentum?
Zeon Corporation (TSE:4205) has seen a 20% increase in stock price over the past three months, but its fundamentals raise concerns about financial health. The company's return on equity (ROE) stands at 7.2%, slightly above the industry average of 6.8%, yet it has experienced flat net income growth over five years. Despite a moderate payout ratio of 41%, the lack of earnings growth suggests potential business decline. Analysts predict future earnings growth, despite past performance, indicating mixed sentiments about the company's prospects.
Zeon's (TSE:4205) stock is up by a considerable 20% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Zeon's ROE.
ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.
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How Is ROE Calculated?
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 Zeon is:
7.2% = JP¥26b ÷ JP¥356b (Based on the trailing twelve months to June 2025).
The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each ¥1 of shareholders' capital it has, the company made ¥0.07 in profit.
View our latest analysis for Zeon
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. 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 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.
A Side By Side comparison of Zeon's Earnings Growth And 7.2% ROE
At first glance, Zeon's ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 6.8%, we may spare it some thought. However, Zeon has seen a flattish net income growth over the past five years, which is not saying much. Remember, the company's ROE is not particularly great to begin with. 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 7.5% over the last few years.
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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. 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 Zeon is trading on a high P/E or a low P/E, relative to its industry.
Is Zeon Using Its Retained Earnings Effectively?
Despite having a moderate three-year median payout ratio of 41% (meaning the company retains59% of profits) in the last three-year period, Zeon's earnings growth was more or les flat. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
Moreover, Zeon has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
Summary
Overall, we have mixed feelings about Zeon. 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. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. 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.
