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    Should We Be Delighted With Nihon Seimitsu Co., Ltd.'s (TSE:7771) ROE Of 30%?

    Simply Wall St·05/17/2025 00:03:12
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    One of the best investments we can make is in our own knowledge and skill set. With that in mind, this article will work through how we can use Return On Equity (ROE) to better understand a business. We'll use ROE to examine Nihon Seimitsu Co., Ltd. (TSE:7771), by way of a worked example.

    Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

    We've discovered 3 warning signs about Nihon Seimitsu. View them for free.

    How Is ROE Calculated?

    The formula for ROE is:

    Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

    So, based on the above formula, the ROE for Nihon Seimitsu is:

    30% = JP¥466m ÷ JP¥1.6b (Based on the trailing twelve months to December 2024).

    The 'return' is the amount earned after tax over the last twelve months. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.30 in profit.

    See our latest analysis for Nihon Seimitsu

    Does Nihon Seimitsu Have A Good Return On Equity?

    By comparing a company's ROE with its industry average, we can get a quick measure of how good it is. Importantly, this is far from a perfect measure, because companies differ significantly within the same industry classification. Pleasingly, Nihon Seimitsu has a superior ROE than the average (5.4%) in the Luxury industry.

    roe
    TSE:7771 Return on Equity May 17th 2025

    That is a good sign. With that said, a high ROE doesn't always indicate high profitability. Especially when a firm uses high levels of debt to finance its debt which may boost its ROE but the high leverage puts the company at risk. To know the 3 risks we have identified for Nihon Seimitsu visit our risks dashboard for free.

    How Does Debt Impact Return On Equity?

    Most companies need money -- from somewhere -- to grow their profits. That cash can come from issuing shares, retained earnings, or debt. In the case of the first and second options, the ROE will reflect this use of cash, for growth. In the latter case, the debt required for growth will boost returns, but will not impact the shareholders' equity. That will make the ROE look better than if no debt was used.

    Combining Nihon Seimitsu's Debt And Its 30% Return On Equity

    It's worth noting the high use of debt by Nihon Seimitsu, leading to its debt to equity ratio of 1.92. While no doubt that its ROE is impressive, we would have been even more impressed had the company achieved this with lower debt. Debt increases risk and reduces options for the company in the future, so you generally want to see some good returns from using it.

    Summary

    Return on equity is useful for comparing the quality of different businesses. Companies that can achieve high returns on equity without too much debt are generally of good quality. If two companies have around the same level of debt to equity, and one has a higher ROE, I'd generally prefer the one with higher ROE.

    Having said that, while ROE is a useful indicator of business quality, you'll have to look at a whole range of factors to determine the right price to buy a stock. The rate at which profits are likely to grow, relative to the expectations of profit growth reflected in the current price, must be considered, too. So I think it may be worth checking this free this detailed graph of past earnings, revenue and cash flow.

    If you would prefer check out another company -- one with potentially superior financials -- then do not miss this free list of interesting companies, that have HIGH return on equity and low debt.