Is Unozawa-gumi Iron Works, Limited's (TSE:6396) Recent Stock Performance Tethered To Its Strong Fundamentals?

Unozawa-gumi Iron Works' (TSE:6396) stock is up by a considerable 24% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Unozawa-gumi Iron Works' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

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How Is ROE Calculated?

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 Unozawa-gumi Iron Works is:

12% = JP¥424m ÷ JP¥3.6b (Based on the trailing twelve months to September 2025).

The 'return' is the income the business earned over the last year. That means that for every ¥1 worth of shareholders' equity, the company generated ¥0.12 in profit.

See our latest analysis for Unozawa-gumi Iron Works

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.

Unozawa-gumi Iron Works' Earnings Growth And 12% ROE

At first glance, Unozawa-gumi Iron Works seems to have a decent ROE. On comparing with the average industry ROE of 7.7% the company's ROE looks pretty remarkable. This certainly adds some context to Unozawa-gumi Iron Works' exceptional 25% net income growth seen over the past five years. We reckon that there could also be other factors at play here. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Unozawa-gumi Iron Works' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 12%.

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. If you're wondering about Unozawa-gumi Iron Works''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Unozawa-gumi Iron Works Making Efficient Use Of Its Profits?

Summary

In total, we are pretty happy with Unozawa-gumi Iron Works' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. You can see the 1 risk we have identified for Unozawa-gumi Iron Works by visiting our risks dashboard for free on our platform here.

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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.