Is El-Mor Electric Installation & Services (1986) Ltd.'s (TLV:ELMR) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Most readers would already be aware that El-Mor Electric Installation & Services (1986)'s (TLV:ELMR) stock increased significantly by 12% over the past three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to El-Mor Electric Installation & Services (1986)'s ROE today.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

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

How To Calculate Return On Equity?

Return on equity 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 El-Mor Electric Installation & Services (1986) is:

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

The 'return' refers to a company's earnings over the last year. So, this means that for every ₪1 of its shareholder's investments, the company generates a profit of ₪0.13.

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. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

A Side By Side comparison of 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. Further, the company's ROE is similar to the industry average of 13%. Given the circumstances, we can't help but wonder why El-Mor Electric Installation & Services (1986) saw little to no growth 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.

As a next step, we compared El-Mor Electric Installation & Services (1986)'s net income growth with the industry and discovered that the industry saw an average growth of 15% in the same period.

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. 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?

In spite of a normal three-year median payout ratio of 49% (or a retention ratio of 51%), El-Mor Electric Installation & Services (1986) hasn't seen much growth in its earnings. 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

On the whole, we do feel that El-Mor Electric Installation & Services (1986) has some positive attributes. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE and and a high reinvestment rate. We believe that there might be some outside factors that could be having a negative impact on the business. 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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