Hiron-Trade Investments & Industrial Buildings Ltd's (TLV:HRON) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Hiron-Trade Investments & Industrial Buildings (TLV:HRON) has had a great run on the share market with its stock up by a significant 9.1% over the last month. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Hiron-Trade Investments & Industrial Buildings' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Hiron-Trade Investments & Industrial Buildings

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 Hiron-Trade Investments & Industrial Buildings is:

9.4% = ₪70m ÷ ₪743m (Based on the trailing twelve months to September 2020).

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 ₪0.09 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. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Hiron-Trade Investments & Industrial Buildings' Earnings Growth And 9.4% ROE

At first glance, Hiron-Trade Investments & Industrial Buildings' ROE doesn't look very promising. However, given that the company's ROE is similar to the average industry ROE of 9.9%, we may spare it some thought. Having said that, Hiron-Trade Investments & Industrial Buildings has shown a modest net income growth of 11% over the past five years. Considering the moderately low ROE, it is quite possible that there might be some other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

As a next step, we compared Hiron-Trade Investments & Industrial Buildings' net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 11% in the same period.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is HRON fairly valued? This infographic on the company's intrinsic value has everything you need to know.

Is Hiron-Trade Investments & Industrial Buildings Making Efficient Use Of Its Profits?

In Hiron-Trade Investments & Industrial Buildings' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 11% (or a retention ratio of 89%), which suggests that the company is investing most of its profits to grow its business.

Additionally, Hiron-Trade Investments & Industrial Buildings has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

Overall, we feel that Hiron-Trade Investments & Industrial Buildings certainly does have some positive factors to consider. Despite its low rate of return, the fact that the company reinvests a very high portion of its profits into its business, no doubt contributed to its high earnings growth. While we won't completely dismiss the company, what we would do, is try to ascertain how risky the business is to make a more informed decision around the company. To know the 1 risk we have identified for Hiron-Trade Investments & Industrial Buildings visit our risks dashboard for free.

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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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