Should Weakness in Isramco Negev 2 Limited Partnership's (TLV:ISRA) Stock Be Seen As A Sign That Market Will Correct The Share Price Given Decent Financials?

It is hard to get excited after looking at Isramco Negev 2 Limited Partnership's (TLV:ISRA) recent performance, when its stock has declined 10% over the past week. However, stock prices are usually driven by a company’s financials over the long term, which in this case look pretty respectable. Particularly, we will be paying attention to Isramco Negev 2 Limited Partnership's ROE today.

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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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How Do You 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 Isramco Negev 2 Limited Partnership is:

21% = US$126m ÷ US$605m (Based on the trailing twelve months to June 2025).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each ₪1 of shareholders' capital it has, the company made ₪0.21 in profit.

Check out our latest analysis for Isramco Negev 2 Limited Partnership

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. 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.

Isramco Negev 2 Limited Partnership's Earnings Growth And 21% ROE

To begin with, Isramco Negev 2 Limited Partnership seems to have a respectable ROE. On comparing with the average industry ROE of 13% the company's ROE looks pretty remarkable. For this reason, Isramco Negev 2 Limited Partnership's five year net income decline of 8.2% raises the question as to why the high ROE didn't translate into earnings growth. Therefore, there might be some other aspects that could explain this. These include low earnings retention or poor allocation of capital.

That being said, we compared Isramco Negev 2 Limited Partnership's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 8.8% in the same 5-year period.

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. 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 Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 74% (implying that 26% of the profits are retained), most of Isramco Negev 2 Limited Partnership's profits are being paid to shareholders, which explains the company's shrinking earnings. With only very little left to reinvest into the business, growth in earnings is far from likely. Our risks dashboard should have the 3 risks we have identified for Isramco Negev 2 Limited Partnership.

Moreover, Isramco Negev 2 Limited Partnership has been paying dividends for eight years, which is a considerable amount of time, suggesting that management must have perceived that the shareholders prefer consistent dividends even though earnings have been shrinking.

Summary

Overall, we feel that Isramco Negev 2 Limited Partnership certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. Up till now, we've only made a short study of the company's growth data. To gain further insights into Isramco Negev 2 Limited Partnership's 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.