Stock Analysis

Can Mixed Fundamentals Have A Negative Impact on Azrieli Group Ltd (TLV:AZRG) Current Share Price Momentum?

TASE:AZRG
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Most readers would already be aware that Azrieli Group's (TLV:AZRG) stock increased significantly by 34% over the past three months. But the company's key financial indicators appear to be differing across the board and that makes us question whether or not the company's current share price momentum can be maintained. In this article, we decided to focus on Azrieli Group's 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. 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 Azrieli Group

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 Azrieli Group is:

5.5% = ₪988m ÷ ₪18b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. One way to conceptualize this is that for each ₪1 of shareholders' capital it has, the company made ₪0.05 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. 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.

Azrieli Group's Earnings Growth And 5.5% ROE

When you first look at it, Azrieli Group's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 9.9%, the company's ROE leaves us feeling even less enthusiastic. Therefore, Azrieli Group's flat earnings over the past five years can possibly be explained by the low ROE amongst other factors.

As a next step, we compared Azrieli Group's net income growth with the industry and discovered that the industry saw an average growth of 11% in the same period.

past-earnings-growth
TASE:AZRG Past Earnings Growth December 31st 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Azrieli Group is trading on a high P/E or a low P/E, relative to its industry.

Is Azrieli Group Efficiently Re-investing Its Profits?

In spite of a normal three-year median payout ratio of 37% (or a retention ratio of 63%), Azrieli Group hasn't seen much growth in its earnings. So there could be some other explanation in that regard. For instance, the company's business may be deteriorating.

In addition, Azrieli Group has been paying dividends over a period of at least ten years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 50% over the next three years. Still, forecasts suggest that Azrieli Group's future ROE will rise to 6.6% even though the the company's payout ratio is expected to rise. We presume that there could some other characteristics of the business that could be driving the anticipated growth in the company's ROE.

Conclusion

On the whole, we feel that the performance shown by Azrieli Group can be open to many interpretations. While the company does have a high rate of reinvestment, the low ROE means that all that reinvestment is not reaping any benefit to its investors, and moreover, its having a negative impact on the earnings growth. With that said, we studied the latest analyst forecasts and found that while the company has shrunk its earnings in the past, analysts expect its earnings to grow in the future. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. 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.
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