Do Its Financials Have Any Role To Play In Driving El-Mor Electric Installation & Services (1986) Ltd.'s (TLV:ELMR) Stock Up Recently?

Most readers would already be aware that El-Mor Electric Installation & Services (1986)'s (TLV:ELMR) stock increased significantly by 23% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study El-Mor Electric Installation & Services (1986)'s ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for El-Mor Electric Installation & Services (1986)

How To Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for El-Mor Electric Installation & Services (1986) is:

13% = ₪16m ÷ ₪120m (Based on the trailing twelve months to September 2020).

The 'return' is the amount earned after tax over the last twelve months. So, this means that for every ₪1 of its shareholder's investments, the company generates a profit of ₪0.13.

Why Is ROE Important For 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.

El-Mor Electric Installation & Services (1986)'s Earnings Growth And 13% ROE

At first glance, El-Mor Electric Installation & Services (1986) seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 14%. However, we are curious as to how El-Mor Electric Installation & Services (1986)'s decent returns still resulted in flat growth for El-Mor Electric Installation & Services (1986) in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared El-Mor Electric Installation & Services (1986)'s net income growth with the industry and found that the average industry growth rate was 8.4% in the same period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if El-Mor Electric Installation & Services (1986) is trading on a high P/E or a low P/E, relative to its industry.

Is El-Mor Electric Installation & Services (1986) Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 49% (implying that the company keeps 51% of its income) over the last three years, El-Mor Electric Installation & Services (1986) has seen a negligible amount of growth in earnings as we saw above. Therefore, there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

In addition, El-Mor Electric Installation & Services (1986) has been paying dividends over a period of three years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.

Summary

Overall, we feel that El-Mor Electric Installation & Services (1986) certainly does have some positive factors to consider. Yet, the low earnings growth is a bit concerning, especially given that the company has a high rate of return and is reinvesting ma huge portion of its profits. By the looks of it, there could be some other factors, not necessarily in control of the business, that's preventing growth. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on El-Mor Electric Installation & Services (1986) and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

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This article by Simply Wall St is general in nature. 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.
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