Does Tomer Energy Royalties (2012) Ltd's (TLV:TOEN) Weak Fundamentals Mean That The Market Could Correct Its Share Price?

Tomer Energy Royalties (2012) (TLV:TOEN) has had a great run on the share market with its stock up by a significant 11% over the last week. However, we decided to pay close attention to its weak financials as we are doubtful that the current momentum will keep up, given the scenario. Particularly, we will be paying attention to Tomer Energy Royalties (2012)'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 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 Tomer Energy Royalties (2012) is:

2.8% = US$2.6m ÷ US$94m (Based on the trailing twelve months to December 2024).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every ₪1 worth of equity, the company was able to earn ₪0.03 in profit.

View our latest analysis for Tomer Energy Royalties (2012)

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. 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.

Tomer Energy Royalties (2012)'s Earnings Growth And 2.8% ROE

It is quite clear that Tomer Energy Royalties (2012)'s ROE is rather low. Even compared to the average industry ROE of 15%, the company's ROE is quite dismal. Therefore, it might not be wrong to say that the five year net income decline of 29% seen by Tomer Energy Royalties (2012) was possibly a result of it having a lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. Such as - low earnings retention or poor allocation of capital.

That being said, we compared Tomer Energy Royalties (2012)'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 29% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. 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. Is Tomer Energy Royalties (2012) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Tomer Energy Royalties (2012) Efficiently Re-investing Its Profits?

Tomer Energy Royalties (2012)'s high three-year median payout ratio of 108% suggests that the company is depleting its resources to keep up its dividend payments, and this shows in its shrinking earnings. Its usually very hard to sustain dividend payments that are higher than reported profits. To know the 5 risks we have identified for Tomer Energy Royalties (2012) visit our risks dashboard for free.

Moreover, Tomer Energy Royalties (2012) has been paying dividends for six 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

On the whole, Tomer Energy Royalties (2012)'s performance is quite a big let-down. Specifically, it has shown quite an unsatisfactory performance as far as earnings growth is concerned, and a poor ROE and an equally poor rate of reinvestment seem to be the reason behind this inadequate performance. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Tomer Energy Royalties (2012)'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.