Has FMS Enterprises Migun Ltd.'s (TLV:FBRT) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

FMS Enterprises Migun's (TLV:FBRT) stock is up by a considerable 9.8% over the past month. 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. In this article, we decided to focus on FMS Enterprises Migun's ROE.

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.

View our latest analysis for FMS Enterprises Migun

How Do You 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 FMS Enterprises Migun is:

24% = US$23m ÷ US$94m (Based on the trailing twelve months to June 2020).

The 'return' is the yearly profit. That means that for every ₪1 worth of shareholders' equity, the company generated ₪0.24 in profit.

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. 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 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.

FMS Enterprises Migun's Earnings Growth And 24% ROE

First thing first, we like that FMS Enterprises Migun has an impressive ROE. Secondly, even when compared to the industry average of 7.5% the company's ROE is quite impressive. Yet, FMS Enterprises Migun has posted measly growth of 4.2% over the past five years. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that FMS Enterprises Migun's reported growth was lower than the industry growth of 11% in the same period, which is not something we like to see.

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. Is FMS Enterprises Migun fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is FMS Enterprises Migun Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 53% (that is, the company retains only 47% of its income) over the past three years for FMS Enterprises Migun suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

In addition, FMS Enterprises Migun has been paying dividends over a period of at least ten 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 FMS Enterprises Migun has some positive attributes. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. You can see the 1 risk we have identified for FMS Enterprises Migun 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. 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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