Declining Stock and Solid Fundamentals: Is The Market Wrong About Mivne Real Estate (K.D) Ltd (TLV:MVNE)?

With its stock down 3.8% over the past three months, it is easy to disregard Mivne Real Estate (K.D) (TLV:MVNE). However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Specifically, we decided to study Mivne Real Estate (K.D)'s ROE in this article.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Mivne Real Estate (K.D)

How Is ROE Calculated?

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 Mivne Real Estate (K.D) is:

15% = ₪916m ÷ ₪6.0b (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. So, this means that for every ₪1 of its shareholder's investments, the company generates a profit of ₪0.15.

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. 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.

Mivne Real Estate (K.D)'s Earnings Growth And 15% ROE

To begin with, Mivne Real Estate (K.D) seems to have a respectable ROE. Especially when compared to the industry average of 9.7% the company's ROE looks pretty impressive. This probably laid the ground for Mivne Real Estate (K.D)'s significant 69% net income growth seen over the past five years. We believe that there might also be other aspects that are positively influencing the company's earnings growth. Such as - high earnings retention or an efficient management in place.

We then compared Mivne Real Estate (K.D)'s net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 11% in the same period.

Earnings growth is a huge factor in stock valuation. 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 Mivne Real Estate (K.D) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Mivne Real Estate (K.D) Making Efficient Use Of Its Profits?

Mivne Real Estate (K.D) doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

On the whole, we feel that Mivne Real Estate (K.D)'s performance has been quite good. In particular, it's great to see that the company is investing heavily into its business and along with a high rate of return, that has resulted in a sizeable growth in its earnings. If the company continues to grow its earnings the way it has, that could have a positive impact on its share price given how earnings per share influence long-term share prices. Let's not forget, business risk is also one of the factors that affects the price of the stock. So this is also an important area that investors need to pay attention to before making a decision on any business. Our risks dashboard would have the 2 risks we have identified for Mivne Real Estate (K.D).

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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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