Summit Real Estate Holdings Ltd (TLV:SMT) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Summit Real Estate Holdings' (TLV:SMT) stock is up by a considerable 9.6% over the past month. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on Summit Real Estate Holdings' ROE.

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. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

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How To 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 Summit Real Estate Holdings is:

4.3% = ₪217m ÷ ₪5.1b (Based on the trailing twelve months to December 2024).

The 'return' is the income the business earned over the last year. That means that for every ₪1 worth of shareholders' equity, the company generated ₪0.04 in profit.

View our latest analysis for Summit Real Estate 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 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.

Summit Real Estate Holdings' Earnings Growth And 4.3% ROE

It is hard to argue that Summit Real Estate Holdings' ROE is much good in and of itself. Not just that, even compared to the industry average of 8.3%, the company's ROE is entirely unremarkable. Therefore, it might not be wrong to say that the five year net income decline of 33% seen by Summit Real Estate Holdings was possibly a result of it having a lower ROE. We reckon that there could also be other factors at play here. Such as - low earnings retention or poor allocation of capital.

That being said, we compared Summit Real Estate Holdings' performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 7.6% in the same 5-year period.

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Summit Real Estate Holdings''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Summit Real Estate Holdings Efficiently Re-investing Its Profits?

Summit Real Estate Holdings' low three-year median payout ratio of 5.5% (implying that it retains the remaining 94% of its profits) comes as a surprise when you pair it with the shrinking earnings. This typically shouldn't be the case when a company is retaining most of its earnings. 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, Summit Real Estate Holdings has been paying dividends over a period of eight years suggesting that keeping up dividend payments is preferred by the management even though earnings have been in decline.

Conclusion

On the whole, we feel that the performance shown by Summit Real Estate Holdings can be open to many interpretations. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. 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 Summit Real Estate Holdings visit our risks dashboard for free.

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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.