Sano Bruno's Enterprises Ltd's (TLV:SANO1) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

Sano Bruno's Enterprises (TLV:SANO1) has had a rough month with its share price down 11%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study Sano Bruno's Enterprises' ROE in this article.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

Check out our latest analysis for Sano Bruno's Enterprises

How To Calculate Return On Equity?

ROE 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 Sano Bruno's Enterprises is:

13% = ₪180m ÷ ₪1.4b (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every ₪1 worth of equity, the company was able to earn ₪0.13 in profit.

What Is The Relationship Between ROE And 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. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Sano Bruno's Enterprises' Earnings Growth And 13% ROE

To start with, Sano Bruno's Enterprises' ROE looks acceptable. Further, the company's ROE is similar to the industry average of 13%. This certainly adds some context to Sano Bruno's Enterprises' moderate 5.9% net income growth seen over the past five years.

We then compared Sano Bruno's Enterprises' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 10% in the same period, which is a bit concerning.

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). Doing so will help them establish if the stock's future looks promising or ominous. 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 Sano Bruno's Enterprises is trading on a high P/E or a low P/E, relative to its industry.

Is Sano Bruno's Enterprises Using Its Retained Earnings Effectively?

With a three-year median payout ratio of 26% (implying that the company retains 74% of its profits), it seems that Sano Bruno's Enterprises is reinvesting efficiently in a way that it sees respectable amount growth in its earnings and pays a dividend that's well covered.

Additionally, Sano Bruno's Enterprises has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Conclusion

Overall, we are quite pleased with Sano Bruno's Enterprises' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising.

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This article by Simply Wall St is general in nature. 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.
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