Is El-Mor Electric Installation & Services (1986) Ltd.'s (TLV:ELMR) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that El-Mor Electric Installation & Services (1986)'s (TLV:ELMR) stock increased significantly by 58% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on El-Mor Electric Installation & Services (1986)'s ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. Put another way, it reveals the company's success at turning shareholder investments into profits.

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

How Do You 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 El-Mor Electric Installation & Services (1986) is:

14% = ₪38m ÷ ₪278m (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. That means that for every ₪1 worth of shareholders' equity, the company generated ₪0.14 in profit.

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

El-Mor Electric Installation & Services (1986)'s Earnings Growth And 14% ROE

To begin with, El-Mor Electric Installation & Services (1986) seems to have a respectable ROE. On comparing with the average industry ROE of 9.2% the company's ROE looks pretty remarkable. This probably laid the ground for El-Mor Electric Installation & Services (1986)'s moderate 15% net income growth seen over the past five years.

As a next step, we compared El-Mor Electric Installation & Services (1986)'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 15% in the same period.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about El-Mor Electric Installation & Services (1986)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is El-Mor Electric Installation & Services (1986) Using Its Retained Earnings Effectively?

El-Mor Electric Installation & Services (1986) has a three-year median payout ratio of 49%, which implies that it retains the remaining 51% of its profits. This suggests that its dividend is well covered, and given the decent growth seen by the company, it looks like management is reinvesting its earnings efficiently.

Additionally, El-Mor Electric Installation & Services (1986) has paid dividends over a period of seven years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we are quite pleased with El-Mor Electric Installation & Services (1986)'s performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. You can see the 1 risk we have identified for El-Mor Electric Installation & Services (1986) 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.