Should Weakness in FMS Enterprises Migun Ltd.'s (TLV:FBRT) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

With its stock down 4.0% over the past week, it is easy to disregard FMS Enterprises Migun (TLV:FBRT). But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Particularly, we will be paying attention to FMS Enterprises Migun'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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for FMS Enterprises Migun

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 FMS Enterprises Migun is:

19% = US$19m ÷ US$98m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every ₪1 worth of shareholders' equity, the company generated ₪0.19 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 19% ROE

To start with, FMS Enterprises Migun's ROE looks acceptable. Especially when compared to the industry average of 9.8% the company's ROE looks pretty impressive. Yet, FMS Enterprises Migun has posted measly growth of 3.0% over the past five years. This is interesting as the high returns should mean that the company has the ability to generate high growth but for some reason, it hasn't been able to do so. 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.

As a next step, we compared FMS Enterprises Migun's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 10% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you're wondering about FMS Enterprises Migun's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is FMS Enterprises Migun Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 50% (or a retention ratio of 50% over the past three years, FMS Enterprises Migun has seen very little growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, FMS Enterprises Migun has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth.

Summary

Overall, we feel that FMS Enterprises Migun 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. 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. Our risks dashboard will have the 1 risk we have identified for FMS Enterprises Migun.

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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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