Is Brimag Digital Age Ltd.'s(TLV:BRMG) Recent Stock Performance Tethered To Its Strong Fundamentals?

Most readers would already be aware that Brimag Digital Age's (TLV:BRMG) stock increased significantly by 31% over the past three months. Given the company's impressive performance, we decided to study its financial indicators more closely as a company's financial health over the long-term usually dictates market outcomes. In this article, we decided to focus on Brimag Digital Age'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 short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for Brimag Digital Age

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 Brimag Digital Age is:

10% = ₪20m ÷ ₪196m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. That means that for every ₪1 worth of shareholders' equity, the company generated ₪0.10 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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.

Brimag Digital Age's Earnings Growth And 10% ROE

To start with, Brimag Digital Age's ROE looks acceptable. On comparing with the average industry ROE of 5.1% the company's ROE looks pretty remarkable. This certainly adds some context to Brimag Digital Age's exceptional 26% net income growth seen over the past five years. We reckon that there could also be other factors at play here. Such as - high earnings retention or an efficient management in place.

We then compared Brimag Digital Age'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. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Brimag Digital Age's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Brimag Digital Age Making Efficient Use Of Its Profits?

Brimag Digital Age's significant three-year median payout ratio of 86% (where it is retaining only 14% of its income) suggests that the company has been able to achieve a high growth in earnings despite returning most of its income to shareholders.

Additionally, Brimag Digital Age 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

In total, we are pretty happy with Brimag Digital Age's performance. In particular, its high ROE is quite noteworthy and also the probable explanation behind its considerable earnings growth. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that's not too bad. So far, we've only made a quick discussion around the company's earnings growth. To gain further insights into Brimag Digital Age's past profit growth, check out this visualization of past earnings, revenue and cash flows.

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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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