Dorsel (B.A.Z.) Ltd's (TLV:DRSL) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

By
Simply Wall St
Published
May 24, 2021
TASE:DRSL
Source: Shutterstock

Most readers would already know that Dorsel (B.A.Z.)'s (TLV:DRSL) stock increased by 8.8% over the past three months. Given that the stock prices usually follow long-term business performance, we wonder if the company's mixed financials could have any adverse effect on its current price price movement Specifically, we decided to study Dorsel (B.A.Z.)'s ROE in this article.

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

View our latest analysis for Dorsel (B.A.Z.)

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 Dorsel (B.A.Z.) is:

8.0% = ₪26m ÷ ₪329m (Based on the trailing twelve months to December 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 ₪0.08.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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.

Dorsel (B.A.Z.)'s Earnings Growth And 8.0% ROE

When you first look at it, Dorsel (B.A.Z.)'s ROE doesn't look that attractive. However, given that the company's ROE is similar to the average industry ROE of 9.1%, we may spare it some thought. Still, Dorsel (B.A.Z.) has seen a flat net income growth over the past five years. Bear in mind, the company's ROE is not very high. So that could also be one of the reasons behind the company's flat growth in earnings.

Next, on comparing with the industry net income growth, we found that Dorsel (B.A.Z.)'s reported growth was lower than the industry growth of 12% in the same period, which is not something we like to see.

past-earnings-growth
TASE:DRSL Past Earnings Growth May 25th 2021

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. What is DRSL worth today? The intrinsic value infographic in our free research report helps visualize whether DRSL is currently mispriced by the market.

Is Dorsel (B.A.Z.) Efficiently Re-investing Its Profits?

While the company did pay out a portion of its dividend in the past, it currently doesn't pay a dividend. We infer that the company has been reinvesting all of its profits to grow its business.

Summary

On the whole, we feel that the performance shown by Dorsel (B.A.Z.) can be open to many interpretations. Even though it appears to be retaining most of its profits, given the low ROE, investors may not be benefitting from all that reinvestment after all. The low earnings growth suggests our theory correct. Up till now, we've only made a short study of the company's growth data. To gain further insights into Dorsel (B.A.Z.)'s past profit growth, check out this visualization of past earnings, revenue and cash flows.

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