Tomer Energy Royalties (2012) Ltd's (TLV:TOEN) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?

Tomer Energy Royalties (2012)'s (TLV:TOEN) stock is up by a considerable 38% over the past three months. 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. In this article, we decided to focus on Tomer Energy Royalties (2012)'s ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Tomer Energy Royalties (2012)

How Do You 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 Tomer Energy Royalties (2012) is:

4.9% = US$4.8m ÷ US$97m (Based on the trailing twelve months to September 2024).

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 ₪0.05 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. 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.

A Side By Side comparison of Tomer Energy Royalties (2012)'s Earnings Growth And 4.9% ROE

At first glance, Tomer Energy Royalties (2012)'s ROE doesn't look very promising. Next, when compared to the average industry ROE of 14%, the company's ROE leaves us feeling even less enthusiastic. For this reason, Tomer Energy Royalties (2012)'s five year net income decline of 32% is not surprising given its lower ROE. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. For instance, the company has a very high payout ratio, or is faced with competitive pressures.

However, when we compared Tomer Energy Royalties (2012)'s growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 1.2% in the same period. This is quite worrisome.

Earnings growth is an important metric to consider when valuing a stock. 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. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Tomer Energy Royalties (2012) is trading on a high P/E or a low P/E, relative to its industry.

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

With a three-year median payout ratio as high as 108%,Tomer Energy Royalties (2012)'s shrinking earnings don't come as a surprise as the company is paying a dividend which is beyond its means. Its usually very hard to sustain dividend payments that are higher than reported profits. You can see the 3 risks we have identified for Tomer Energy Royalties (2012) by visiting our risks dashboard for free on our platform here.

Additionally, Tomer Energy Royalties (2012) 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.

Conclusion

On the whole, Tomer Energy Royalties (2012)'s performance is quite a big let-down. Particularly, its ROE is a huge disappointment, not to mention its lack of proper reinvestment into the business. As a result its earnings growth has also been quite disappointing. So far, we've only made a quick discussion around the company's earnings growth. You can do your own research on Tomer Energy Royalties (2012) and see how it has performed in the past by looking at this FREE detailed graph 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.