Migdal Insurance and Financial Holdings Ltd.'s (TLV:MGDL) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Migdal Insurance and Financial Holdings (TLV:MGDL) has had a great run on the share market with its stock up by a significant 58% over the last three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Migdal Insurance and Financial Holdings' 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. Put another way, it reveals the company's success at turning shareholder investments into profits.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

How Is ROE Calculated?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Migdal Insurance and Financial Holdings is:

11% = ₪891m ÷ ₪8.4b (Based on the trailing twelve months to March 2025).

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 ₪0.11 in profit.

View our latest analysis for Migdal Insurance and Financial Holdings

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Migdal Insurance and Financial Holdings' Earnings Growth And 11% ROE

At first glance, Migdal Insurance and Financial Holdings' ROE doesn't look very promising. However, its ROE is similar to the industry average of 13%, so we won't completely dismiss the company. On the other hand, Migdal Insurance and Financial Holdings reported a moderate 14% net income growth over the past five years. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Migdal Insurance and Financial Holdings' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 13% 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. If you're wondering about Migdal Insurance and Financial Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Migdal Insurance and Financial Holdings Using Its Retained Earnings Effectively?

Migdal Insurance and Financial Holdings has a low three-year median payout ratio of 4.2%, meaning that the company retains the remaining 96% of its profits. This suggests that the management is reinvesting most of the profits to grow the business.

Besides, Migdal Insurance and Financial Holdings 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 feel that Migdal Insurance and Financial Holdings certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.