Does the recent performance of Isras Investment Company Ltd (TLV: ISRS) stock have anything to do with its financial health?
Isras Investment (TLV: ISRS) shares have risen 6.3% in the past three months. We wonder if and what role company financials are playing in this price change, as a company’s long-term fundamentals usually dictate market outcomes. In particular, we will pay particular attention to the ROE of Isras Investment today.
Return on equity or ROE is an important factor for a shareholder to consider because it tells them how efficiently their capital is being reinvested. In simpler terms, it measures a company’s profitability relative to equity.
See our latest analysis for Isras Investment
How is the ROE calculated?
the formula for ROE is:
Return on equity = Net income (from continuing operations) Ã· Equity
Thus, on the basis of the above formula, the ROE for Isras Investment is:
9.1% = âª 322m Ã· âª 3.6b (Based on the last twelve months up to March 2021).
The “return” is the income the business has earned over the past year. Another way to look at this is that for every 1 âª of equity, the company was able to make 0.09 profit.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE measures how efficiently a business generates profits. Based on the portion of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Generally speaking, all other things being equal, companies with high return on equity and high profit retention have a higher growth rate than companies that do not share these attributes.
A side-by-side comparison of Isras Investment’s 9.1% profit growth and ROE
At first glance, the ROE of Isras Investment does not seem so attractive. However, its ROE is similar to the industry average of 8.8%, so we won’t dismiss the company completely. Despite this, Isras Investment posted fairly decent growth in its net income which grew at a rate of 8.9%. Given the slightly low ROE, it is likely that other aspects are behind this growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
As a next step, we compared Isras Investment’s net income growth with the industry and found that the company has a similar growth figure compared to the industry average growth rate of 9.2% over the course of from the same period.
Profit growth is an important metric to consider when valuing a stock. What investors next need to determine is whether the expected earnings growth, or lack thereof, is already built into the share price. This will help them determine whether the future of the stock looks bright or threatening. Is Isras Investment just valued compared to other companies? These 3 evaluation measures could help you decide.
Is Isras Investment making efficient use of its profits?
Isras Investment has a three-year median payout rate of 27%, which means it keeps the remaining 73% of its profits. This suggests that its dividend is well hedged and, given the decent growth seen by the company, it appears that management is reinvesting its earnings in an efficient manner.
In addition, Isras Investment is determined to continue to share its profits with its shareholders, which we deduce from its long history of paying dividends for at least ten years.
Overall, we believe that Israel Investment certainly has some positive factors to consider. With a high reinvestment rate, but a low ROE, the company has managed to see considerable growth in profits. While we don’t completely reject the business, what we would do is try to determine how risky the business is in order to make a more informed decision about the business. Our risk dashboard would include the 4 risks that we have identified for Isras Investment.
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