Is Lapidoth Capital Ltd's (TLV:LAPD) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

October 03, 2022
  •  Updated
November 23, 2022
TASE:LAPD
Source: Shutterstock

Most readers would already be aware that Lapidoth Capital's (TLV:LAPD) stock increased significantly by 16% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. Particularly, we will be paying attention to Lapidoth Capital'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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

Check out our latest analysis for Lapidoth Capital

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 Lapidoth Capital is:

21% = ₪546m ÷ ₪2.6b (Based on the trailing twelve months to June 2022).

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 ₪0.21.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Lapidoth Capital's Earnings Growth And 21% ROE

At first glance, Lapidoth Capital seems to have a decent ROE. Especially when compared to the industry average of 6.5% the company's ROE looks pretty impressive. This probably laid the ground for Lapidoth Capital's significant 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 instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Lapidoth Capital's growth is quite high when compared to the industry average growth of 11% in the same period, which is great to see.

past-earnings-growth
TASE:LAPD Past Earnings Growth October 3rd 2022

Earnings growth is a huge factor in stock valuation. 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. Is Lapidoth Capital fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Lapidoth Capital Making Efficient Use Of Its Profits?

Lapidoth Capital's ' three-year median payout ratio is on the lower side at 23% implying that it is retaining a higher percentage (77%) of its profits. So it seems like the management is reinvesting profits heavily to grow its business and this reflects in its earnings growth number.

Besides, Lapidoth Capital 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 Lapidoth Capital'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. 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 2 risks we have identified for Lapidoth Capital by visiting our risks dashboard for free on our platform here.

Valuation is complex, but we're helping make it simple.

Find out whether Lapidoth Capital is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis