Is Meshulam Levinstein Contracting & Engineering Ltd.'s (TLV:LEVI) Latest Stock Performance A Reflection Of Its Financial Health?

Meshulam Levinstein Contracting & Engineering (TLV:LEVI) has had a great run on the share market with its stock up by a significant 33% over the last 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. Specifically, we decided to study Meshulam Levinstein Contracting & Engineering's ROE in this article.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Meshulam Levinstein Contracting & Engineering

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 Meshulam Levinstein Contracting & Engineering is:

12% = ₪129m ÷ ₪1.1b (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every ₪1 worth of shareholders' equity, the company generated ₪0.12 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Meshulam Levinstein Contracting & Engineering's Earnings Growth And 12% ROE

To begin with, Meshulam Levinstein Contracting & Engineering seems to have a respectable ROE. Even when compared to the industry average of 14% the company's ROE looks quite decent. This probably goes some way in explaining Meshulam Levinstein Contracting & Engineering's moderate 15% growth over the past five years amongst other factors.

As a next step, we compared Meshulam Levinstein Contracting & Engineering's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 8.4%.

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. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Meshulam Levinstein Contracting & Engineering's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Meshulam Levinstein Contracting & Engineering Efficiently Re-investing Its Profits?

Meshulam Levinstein Contracting & Engineering's three-year median payout ratio to shareholders is 20% (implying that it retains 80% of its income), which is on the lower side, so it seems like the management is reinvesting profits heavily to grow its business.

Additionally, Meshulam Levinstein Contracting & Engineering has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

In total, we are pretty happy with Meshulam Levinstein Contracting & Engineering's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 3 risks we have identified for Meshulam Levinstein Contracting & Engineering 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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