Are Accel Solutions Group Ltd's (TLV:ACCL) Mixed Financials Driving The Negative Sentiment?

By
Simply Wall St
Published
August 11, 2021
TASE:ACCL
Source: Shutterstock

Accel Solutions Group (TLV:ACCL) has had a rough three months with its share price down 30%. We, however decided to study the company's financials to determine if they have got anything to do with the price decline. Fundamentals usually dictate market outcomes so it makes sense to study the company's financials. Particularly, we will be paying attention to Accel Solutions Group's ROE today.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Accel Solutions Group

How To Calculate Return On Equity?

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 Accel Solutions Group is:

1.6% = ₪1.2m ÷ ₪78m (Based on the trailing twelve months to March 2021).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every ₪1 worth of equity, the company was able to earn ₪0.02 in profit.

Why Is ROE Important For 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.

Accel Solutions Group's Earnings Growth And 1.6% ROE

As you can see, Accel Solutions Group's ROE looks pretty weak. Not just that, even compared to the industry average of 8.8%, the company's ROE is entirely unremarkable. Given the circumstances, the significant decline in net income by 14% seen by Accel Solutions Group over the last five years is not surprising. We believe that there also might be other aspects that are negatively influencing the company's earnings prospects. Such as - low earnings retention or poor allocation of capital.

So, as a next step, we compared Accel Solutions Group's performance against the industry and were disappointed to discover that while the company has been shrinking its earnings, the industry has been growing its earnings at a rate of 9.2% in the same period.

past-earnings-growth
TASE:ACCL Past Earnings Growth August 12th 2021

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Accel Solutions Group fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Accel Solutions Group Using Its Retained Earnings Effectively?

Accel Solutions Group doesn't pay any dividend, meaning that potentially all of its profits are being reinvested in the business, which doesn't explain why the company's earnings have shrunk if it is retaining all of its profits. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Conclusion

Overall, we have mixed feelings about Accel Solutions Group. 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 4 risks we have identified for Accel Solutions Group visit our risks dashboard for free.

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