Harel Insurance Investments & Financial Services' (TLV:HARL) stock is up by a considerable 16% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. Specifically, we decided to study Harel Insurance Investments & Financial Services' ROE in this article.
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. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
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 Harel Insurance Investments & Financial Services is:
9.4% = ₪725m ÷ ₪7.8b (Based on the trailing twelve months to December 2020).
The 'return' refers to a company's earnings over the last year. That means that for every ₪1 worth of shareholders' equity, the company generated ₪0.09 in profit.
What Has ROE Got To Do With 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.
Harel Insurance Investments & Financial Services' Earnings Growth And 9.4% ROE
When you first look at it, Harel Insurance Investments & Financial Services' ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 9.4%. Having said that, Harel Insurance Investments & Financial Services' five year net income decline rate was 2.5%. Remember, the company's ROE is a bit low to begin with. Hence, this goes some way in explaining the shrinking earnings.
Next, on comparing with the industry net income growth, we found that Harel Insurance Investments & Financial Services' earnings seems to be shrinking at a similar rate as the industry which shrunk at a rate of a rate of 2.5% in the same period.
Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Harel Insurance Investments & Financial Services fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is Harel Insurance Investments & Financial Services Efficiently Re-investing Its Profits?
In spite of a normal three-year median payout ratio of 44% (that is, a retention ratio of 56%), the fact that Harel Insurance Investments & Financial Services' earnings have shrunk is quite puzzling. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.
In addition, Harel Insurance Investments & Financial Services has been paying dividends over a period of nine years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.
In total, we're a bit ambivalent about Harel Insurance Investments & Financial Services' performance. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Wrapping up, we would proceed with caution with this company and one way of doing that would be to look at the risk profile of the business. To know the 3 risks we have identified for Harel Insurance Investments & Financial Services visit our risks dashboard for free.
If you’re looking to trade Harel Insurance Investments & Financial Services, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted
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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
Valuation is complex, but we're helping make it simple.
Find out whether Harel Insurance Investments & Financial Services 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