Rimon Consulting & Management Services Ltd.'s (TLV:RMON) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

Rimon Consulting & Management Services (TLV:RMON) has had a rough week with its share price down 11%. But if you pay close attention, you might gather that its strong financials could mean that the stock could potentially see an increase in value in the long-term, given how markets usually reward companies with good financial health. In this article, we decided to focus on Rimon Consulting & Management Services' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Rimon Consulting & Management Services

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Rimon Consulting & Management Services is:

12% = ₪66m ÷ ₪529m (Based on the trailing twelve months to September 2024).

The 'return' is the income the business earned over the last year. So, this means that for every ₪1 of its shareholder's investments, the company generates a profit of ₪0.12.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

A Side By Side comparison of Rimon Consulting & Management Services' Earnings Growth And 12% ROE

At first glance, Rimon Consulting & Management Services seems to have a decent ROE. Especially when compared to the industry average of 9.2% the company's ROE looks pretty impressive. This certainly adds some context to Rimon Consulting & Management Services' exceptional 33% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared Rimon Consulting & Management Services' 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 15%.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. 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 Rimon Consulting & Management Services''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Rimon Consulting & Management Services Making Efficient Use Of Its Profits?

The three-year median payout ratio for Rimon Consulting & Management Services is 45%, which is moderately low. The company is retaining the remaining 55%. So it seems that Rimon Consulting & Management Services is reinvesting efficiently in a way that it sees impressive growth in its earnings (discussed above) and pays a dividend that's well covered.

While Rimon Consulting & Management Services has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend.

Conclusion

On the whole, we feel that Rimon Consulting & Management Services' performance has been quite good. 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. 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 Rimon Consulting & Management Services 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.