Is Weakness In Brill Shoe Industries Ltd. (TLV:BRIL) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

It is hard to get excited after looking at Brill Shoe Industries' (TLV:BRIL) recent performance, when its stock has declined 17% over the past three months. 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 Brill Shoe Industries' 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 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 Brill Shoe Industries

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Brill Shoe Industries is:

33% = ₪48m ÷ ₪145m (Based on the trailing twelve months to March 2022).

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 ₪0.33 in profit.

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. 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.

Brill Shoe Industries' Earnings Growth And 33% ROE

Firstly, we acknowledge that Brill Shoe Industries has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 10% which is quite remarkable. So, the substantial 68% net income growth seen by Brill Shoe Industries over the past five years isn't overly surprising.

Next, on comparing with the industry net income growth, we found that Brill Shoe Industries' growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

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. If you're wondering about Brill Shoe Industries''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Brill Shoe Industries Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 52% (implying that it keeps only 48% of profits) for Brill Shoe Industries suggests that the company's growth wasn't really hampered despite it returning most of the earnings to its shareholders.

Moreover, Brill Shoe Industries is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years.

Summary

On the whole, we feel that Brill Shoe Industries' performance has been quite good. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. Until now, we have only just grazed the surface of the company's past performance by looking at the company's fundamentals. To gain further insights into Brill Shoe Industries' past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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.