Are Strong Financial Prospects The Force That Is Driving The Momentum In Aran Research & Development (1982) Ltd.'s TLV:ARAN) Stock?

Aran Research & Development (1982) (TLV:ARAN) has had a great run on the share market with its stock up by a significant 12% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Particularly, we will be paying attention to Aran Research & Development (1982)'s ROE today.

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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Aran Research & Development (1982)

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 Aran Research & Development (1982) is:

24% = ₪23m ÷ ₪96m (Based on the trailing twelve months to June 2023).

The 'return' is the yearly profit. So, this means that for every ₪1 of its shareholder's investments, the company generates a profit of ₪0.24.

What Has ROE Got To Do With 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. 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.

Aran Research & Development (1982)'s Earnings Growth And 24% ROE

Firstly, we acknowledge that Aran Research & Development (1982) has a significantly high ROE. Secondly, even when compared to the industry average of 3.7% the company's ROE is quite impressive. As a result, Aran Research & Development (1982)'s exceptional 30% net income growth seen over the past five years, doesn't come as a surprise.

Next, on comparing with the industry net income growth, we found that the growth figure reported by Aran Research & Development (1982) compares quite favourably to the industry average, which shows a decline of 10% over the last few years.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Aran Research & Development (1982)'s's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Aran Research & Development (1982) Making Efficient Use Of Its Profits?

Aran Research & Development (1982)'s three-year median payout ratio is a pretty moderate 37%, meaning the company retains 63% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Aran Research & Development (1982) is reinvesting its earnings efficiently.

Besides, Aran Research & Development (1982) has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Aran Research & Development (1982)'s performance. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. 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 4 risks we have identified for Aran Research & Development (1982) 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.