Arad Investment & Industrial Development Ltd.'s (TLV:ARAD) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Arad Investment & Industrial Development (TLV:ARAD) has had a rough three months with its share price down 10%. 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. Particularly, we will be paying attention to Arad Investment & Industrial Development's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Arad Investment & Industrial Development

How To Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for Arad Investment & Industrial Development is:

11% = ₪539m ÷ ₪5.1b (Based on the trailing twelve months to June 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₪1 of shareholders' capital it has, the company made ₪0.11 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Arad Investment & Industrial Development's Earnings Growth And 11% ROE

To start with, Arad Investment & Industrial Development's ROE looks acceptable. Further, the company's ROE is similar to the industry average of 10%. Consequently, this likely laid the ground for the decent growth of 12% seen over the past five years by Arad Investment & Industrial Development.

As a next step, we compared Arad Investment & Industrial Development's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 14% in the same period.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Arad Investment & Industrial Development's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Arad Investment & Industrial Development Efficiently Re-investing Its Profits?

In Arad Investment & Industrial Development's case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 6.8% (or a retention ratio of 93%), which suggests that the company is investing most of its profits to grow its business.

Additionally, Arad Investment & Industrial Development has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

On the whole, we feel that Arad Investment & Industrial Development's performance has been quite good. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 3 risks we have identified for Arad Investment & Industrial Development 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.