Is Mordechai Aviv Taasiot Beniyah (1973) Ltd.'s (TLV:AVIV) ROE Of 5.0% Concerning?

While some investors are already well versed in financial metrics (hat tip), this article is for those who would like to learn about Return On Equity (ROE) and why it is important. We'll use ROE to examine Mordechai Aviv Taasiot Beniyah (1973) Ltd. (TLV:AVIV), by way of a worked example.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

See our latest analysis for Mordechai Aviv Taasiot Beniyah (1973)

How Do You Calculate Return On Equity?

The formula for ROE is:

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

So, based on the above formula, the ROE for Mordechai Aviv Taasiot Beniyah (1973) is:

5.0% = ₪14m ÷ ₪278m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. So, this means that for every ₪1 of its shareholder's investments, the company generates a profit of ₪0.05.

Does Mordechai Aviv Taasiot Beniyah (1973) Have A Good Return On Equity?

By comparing a company's ROE with its industry average, we can get a quick measure of how good it is. The limitation of this approach is that some companies are quite different from others, even within the same industry classification. As is clear from the image below, Mordechai Aviv Taasiot Beniyah (1973) has a lower ROE than the average (9.9%) in the Real Estate industry.

That certainly isn't ideal. Although, we think that a lower ROE could still mean that a company has the opportunity to better its returns with the use of leverage, provided its existing debt levels are low. A high debt company having a low ROE is a different story altogether and a risky investment in our books. Our risks dashboard should have the 6 risks we have identified for Mordechai Aviv Taasiot Beniyah (1973).

The Importance Of Debt To Return On Equity

Virtually all companies need money to invest in the business, to grow profits. The cash for investment can come from prior year profits (retained earnings), issuing new shares, or borrowing. In the first two cases, the ROE will capture this use of capital to grow. In the latter case, the debt required for growth will boost returns, but will not impact the shareholders' equity. That will make the ROE look better than if no debt was used.

Combining Mordechai Aviv Taasiot Beniyah (1973)'s Debt And Its 5.0% Return On Equity

Mordechai Aviv Taasiot Beniyah (1973) clearly uses a high amount of debt to boost returns, as it has a debt to equity ratio of 1.33. Its ROE is quite low, even with the use of significant debt; that's not a good result, in our opinion. Debt does bring extra risk, so it's only really worthwhile when a company generates some decent returns from it.

Summary

Return on equity is a useful indicator of the ability of a business to generate profits and return them to shareholders. In our books, the highest quality companies have high return on equity, despite low debt. If two companies have around the same level of debt to equity, and one has a higher ROE, I'd generally prefer the one with higher ROE.

But when a business is high quality, the market often bids it up to a price that reflects this. It is important to consider other factors, such as future profit growth -- and how much investment is required going forward. You can see how the company has grow in the past by looking at this FREE detailed graph of past earnings, revenue and cash flow.

But note: Mordechai Aviv Taasiot Beniyah (1973) may not be the best stock to buy. So take a peek at this free list of interesting companies with high ROE and low debt.

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