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    SMS Co., Ltd.'s (TSE:2175) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

    Simply Wall St·04/06/2025 23:42:58
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    With its stock down 31% over the past three months, it is easy to disregard SMS (TSE:2175). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study SMS' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

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    How To Calculate Return On Equity?

    ROE 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 SMS is:

    16% = JP¥6.7b ÷ JP¥43b (Based on the trailing twelve months to December 2024).

    The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every ¥1 worth of equity, the company was able to earn ¥0.16 in profit.

    See our latest analysis for SMS

    What Has ROE Got To Do With Earnings Growth?

    Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

    SMS' Earnings Growth And 16% ROE

    To start with, SMS' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 15%. This probably goes some way in explaining SMS' moderate 8.6% growth over the past five years amongst other factors.

    As a next step, we compared SMS' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 13% in the same period.

    past-earnings-growth
    TSE:2175 Past Earnings Growth April 6th 2025

    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. What is 2175 worth today? The intrinsic value infographic in our free research report helps visualize whether 2175 is currently mispriced by the market.

    Is SMS Making Efficient Use Of Its Profits?

    SMS has a low three-year median payout ratio of 20%, meaning that the company retains the remaining 80% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

    Besides, SMS has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

    Conclusion

    In total, we are pretty happy with SMS' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.