Isramco Negev 2 Limited Partnership's (TLV:ISRA) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Isramco Negev 2 Limited Partnership (TLV:ISRA) has had a great run on the share market with its stock up by a significant 17% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Specifically, we decided to study Isramco Negev 2 Limited Partnership'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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

See our latest analysis for Isramco Negev 2 Limited Partnership

How Is ROE Calculated?

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 Isramco Negev 2 Limited Partnership is:

24% = US$145m ÷ US$598m (Based on the trailing twelve months to September 2023).

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 ₪0.24 in profit.

Why Is ROE Important For 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Isramco Negev 2 Limited Partnership's Earnings Growth And 24% ROE

To begin with, Isramco Negev 2 Limited Partnership has a pretty high ROE which is interesting. Further, even comparing with the industry average if 21%, the company's ROE is quite respectable. Needless to say, we are quite surprised to see that Isramco Negev 2 Limited Partnership's net income shrunk at a rate of 28% over the past five years in spite of its decent. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.

So, as a next step, we compared Isramco Negev 2 Limited Partnership's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 18% over the last few years.

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Isramco Negev 2 Limited Partnership fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Isramco Negev 2 Limited Partnership Efficiently Re-investing Its Profits?

Despite having a normal three-year median payout ratio of 46% (where it is retaining 54% of its profits), Isramco Negev 2 Limited Partnership has seen a decline in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.

Additionally, Isramco Negev 2 Limited Partnership has paid dividends over a period of six years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Summary

In total, it does look like Isramco Negev 2 Limited Partnership has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 3 risks we have identified for Isramco Negev 2 Limited Partnership visit our risks dashboard for free.

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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.