Kardan Real Estate Enterprise and Development Ltd. (TLV:KARE) Is Going Strong But Fundamentals Appear To Be Mixed : Is There A Clear Direction For The Stock?

Kardan Real Estate Enterprise and Development's (TLV:KARE) stock is up by a considerable 36% over the past three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study Kardan Real Estate Enterprise and Development's ROE in this article.

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 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 Kardan Real Estate Enterprise and Development

How Is ROE Calculated?

ROE 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 Kardan Real Estate Enterprise and Development is:

5.6% = ₪30m ÷ ₪532m (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every ₪1 worth of equity, the company was able to earn ₪0.06 in profit.

Why Is ROE Important For Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Kardan Real Estate Enterprise and Development's Earnings Growth And 5.6% ROE

At first glance, Kardan Real Estate Enterprise and Development's ROE doesn't look very promising. A quick further study shows that the company's ROE doesn't compare favorably to the industry average of 9.9% either. Given the circumstances, the significant decline in net income by 4.1% seen by Kardan Real Estate Enterprise and Development over the last five years is not surprising. However, there could also be other factors causing the earnings to decline. Such as - low earnings retention or poor allocation of capital.

However, when we compared Kardan Real Estate Enterprise and Development's growth with the industry we found that while the company's earnings have been shrinking, the industry has seen an earnings growth of 11% in the same period. This is quite worrisome.

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. Doing so will help them establish if the stock's future looks promising or ominous. Is Kardan Real Estate Enterprise and Development fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Kardan Real Estate Enterprise and Development Making Efficient Use Of Its Profits?

Looking at its three-year median payout ratio of 43% (or a retention ratio of 57%) which is pretty normal, Kardan Real Estate Enterprise and Development's declining earnings is rather baffling as one would expect to see a fair bit of growth when a company is retaining a good portion of its profits. It looks like there might be some other reasons to explain the lack in that respect. For example, the business could be in decline.

Additionally, Kardan Real Estate Enterprise and Development has paid dividends over a period of six years, which means that the company's management is rather focused on keeping up its dividend payments, regardless of the shrinking earnings.

Summary

Overall, we have mixed feelings about Kardan Real Estate Enterprise and Development. 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. 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. Our risks dashboard would have the 5 risks we have identified for Kardan Real Estate Enterprise and Development.

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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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