Stock Analysis

Has Menora Mivtachim Holdings Ltd's (TLV:MMHD) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

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TASE:MMHD
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Menora Mivtachim Holdings (TLV:MMHD) has had a great run on the share market with its stock up by a significant 25% 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. In this article, we decided to focus on Menora Mivtachim Holdings' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Menora Mivtachim Holdings

How Is ROE Calculated?

The formula for ROE is:

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

So, based on the above formula, the ROE for Menora Mivtachim Holdings is:

4.3% = ₪181m ÷ ₪4.2b (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 ₪0.04 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Menora Mivtachim Holdings' Earnings Growth And 4.3% ROE

On the face of it, Menora Mivtachim Holdings' ROE is not much to talk about. Next, when compared to the average industry ROE of 8.8%, the company's ROE leaves us feeling even less enthusiastic. However, the moderate 18% net income growth seen by Menora Mivtachim Holdings over the past five years is definitely a positive. So, there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing with the industry net income growth, we found that Menora Mivtachim Holdings' growth is quite high when compared to the industry average growth of 12% in the same period, which is great to see.

past-earnings-growth
TASE:MMHD Past Earnings Growth November 27th 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for MMHD? You can find out in our latest intrinsic value infographic research report

Is Menora Mivtachim Holdings Making Efficient Use Of Its Profits?

In Menora Mivtachim Holdings' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 15% (or a retention ratio of 85%), which suggests that the company is investing most of its profits to grow its business.

Moreover, Menora Mivtachim Holdings is determined to keep sharing its profits with shareholders which we infer from its long history of seven years of paying a dividend.

Summary

In total, it does look like Menora Mivtachim Holdings has some positive aspects to its business. Even in spite of the low rate of return, the company has posted impressive earnings growth as a result of reinvesting heavily into its business. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. Our risks dashboard would have the 3 risks we have identified for Menora Mivtachim Holdings.

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