Does the impressive performance of Israel Corporation Ltd (TLV:ILCO) shares have something to do with its fundamentals?

Israel (TLV:ILCO) stock is up 46% in the past three months. Since stock prices are usually aligned with a company’s financial performance over the long term, we decided to take a closer look at its financial indicators to see if they had a role to play in the recent price movement. . In this article, we decided to focus on the ROE of Israel.

Return on equity or ROE is an important factor for a shareholder to consider as it tells them how much of their capital is being reinvested. In short, ROE shows the profit that each dollar generates in relation to the investments of its shareholders.

See our latest analysis for Israel

How is ROE calculated?

the ROE formula is:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Israel is:

13% = $562 million ÷ $4.3 billion (based on trailing 12 months to December 2021).

The “return” is the annual profit. This therefore means that for every ₪1 of its shareholder’s investment, the company generates a profit of 0.13 ₪.

Why is ROE important for earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. Depending on how much of those earnings the company reinvests or “keeps”, and how efficiently it does so, we are then able to gauge a company’s earnings growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

A side-by-side comparison of Israel’s earnings growth and 13% ROE

For starters, Israel seems to have a respectable ROE. Regardless, the company’s ROE is still well below the industry average of 18%. Moreover, Israel’s net income has decreased by 17% over the past five years. Keep in mind that the company has a high ROE. It’s just that the industry’s ROE is higher. Therefore, there could be other aspects that result in less revenue. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.

However, when we compared Israel’s growth with the industry, we found that although company profits were down, the industry experienced 7.8% profit growth over the past year. same period. It’s quite worrying.

TASE: ILCO Past Earnings Growth April 29, 2022

Earnings growth is an important metric to consider when evaluating a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This will help him determine if the future of the stock looks bright or ominous. What is ILCO worth today? The intrinsic value infographic in our free research report helps visualize whether ILCO is currently being mispriced by the market.

Is Israel using its retained earnings effectively?

Israel pays no dividends, which means the company keeps all of its profits, which makes us wonder why it keeps its profits if it can’t use them to grow its business. So there could be other factors at play here that could potentially impede growth. For example, the company had to deal with headwinds.

Conclusion

Overall, we believe that Israel has positive attributes. Still, the weak earnings growth is a bit of a concern, especially since the company has a respectable rate of return and reinvests a huge portion of its earnings. At first glance, there could be other factors, which do not necessarily control the business, that are preventing growth. While we wouldn’t completely dismiss the business, what we would do is try to figure out how risky the business is to make a more informed decision about the business. To learn about the 3 risks we have identified for Israel, visit our risk dashboard for free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Ian Crawford

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