Is IMCO Industries Ltd.'s (TLV:IMCO) Recent Performancer Underpinned By Weak Financials?

By
Simply Wall St
Published
August 31, 2021
TASE:IMCO
Source: Shutterstock

It is hard to get excited after looking at IMCO Industries' (TLV:IMCO) recent performance, when its stock has declined 15% over the past three months. We decided to study the company's financials to determine if the downtrend will continue as the long-term performance of a company usually dictates market outcomes. In this article, we decided to focus on IMCO Industries' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for IMCO Industries

How To Calculate Return On Equity?

ROE 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 IMCO Industries is:

2.7% = ₪2.4m ÷ ₪88m (Based on the trailing twelve months to December 2020).

The 'return' is the yearly profit. So, this means that for every ₪1 of its shareholder's investments, the company generates a profit of ₪0.03.

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 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.

IMCO Industries' Earnings Growth And 2.7% ROE

It is hard to argue that IMCO Industries' ROE is much good in and of itself. Even compared to the average industry ROE of 11%, the company's ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 20% seen by IMCO Industries was possibly a result of it having a lower ROE. However, there could also be other factors causing the earnings to decline. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared IMCO Industries' growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 0.3% in the same period. This is quite worrisome.

past-earnings-growth
TASE:IMCO Past Earnings Growth September 1st 2021

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. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is IMCO Industries fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is IMCO Industries Efficiently Re-investing Its Profits?

IMCO Industries' declining earnings is not surprising given how the company is spending most of its profits in paying dividends, judging by its three-year median payout ratio of 83% (or a retention ratio of 17%). With only very little left to reinvest into the business, growth in earnings is far from likely. To know the 4 risks we have identified for IMCO Industries visit our risks dashboard for free.

In addition, IMCO Industries 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

In total, we would have a hard think before deciding on any investment action concerning IMCO Industries. As a result of its low ROE and lack of much reinvestment into the business, the company has seen a disappointing earnings growth rate. Up till now, we've only made a short study of the company's growth data. So it may be worth checking this free detailed graph of IMCO Industries' past earnings, as well as revenue and cash flows to get a deeper insight into the company's performance.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted


Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.