Nichirei Corporation's (TSE:2871) Stock Has Shown Weakness Lately But Financial Prospects Look Decent: Is The Market Wrong?
Nichirei Corporation's stock has declined 6.8% over the past three months, despite decent fundamentals. The company's return on equity (ROE) stands at 9.7%, above the industry average of 7.6%. However, earnings growth has been low at 4.6% over the past five years, lagging behind the industry average of 8.8%. Despite a moderate payout ratio of 36%, the company faces challenges that may hinder growth. Analysts forecast continued earnings expansion, indicating potential for future improvement.
It is hard to get excited after looking at Nichirei's (TSE:2871) recent performance, when its stock has declined 6.8% over the past three months. However, the company's fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study Nichirei's ROE in this article.
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. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
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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 Nichirei is:
9.7% = JP¥26b ÷ JP¥273b (Based on the trailing twelve months to June 2025).
The 'return' is the income the business earned over the last year. So, this means that for every ¥1 of its shareholder's investments, the company generates a profit of ¥0.10.
Check out our latest analysis for Nichirei
What Has ROE Got To Do With Earnings Growth?
So far, we've learned that ROE is a measure of a company's profitability. 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.
Nichirei's Earnings Growth And 9.7% ROE
To start with, Nichirei's ROE looks acceptable. Especially when compared to the industry average of 7.6% the company's ROE looks pretty impressive. Yet, Nichirei has posted measly growth of 4.6% over the past five years. This is generally not the case as when a company has a high rate of return it should usually also have a high earnings growth rate. Such a scenario is likely to take place when a company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.
We then compared Nichirei's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 8.8% in the same 5-year period, which is a bit concerning.
Earnings growth is a huge factor in stock valuation. 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. Has the market priced in the future outlook for 2871? You can find out in our latest intrinsic value infographic research report.
Is Nichirei Making Efficient Use Of Its Profits?
Despite having a moderate three-year median payout ratio of 36% (implying that the company retains the remaining 64% of its income), Nichirei's earnings growth was quite low. 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, Nichirei 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.
Summary
In total, it does look like Nichirei has some positive aspects to its business. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. 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.
