Hamashbir 365 Ltd's (TLV:MSBI) Fundamentals Look Pretty Strong: Could The Market Be Wrong About The Stock?

It is hard to get excited after looking at Hamashbir 365's (TLV:MSBI) recent performance, when its stock has declined 11% over the past week. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. Specifically, we decided to study Hamashbir 365'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. Put another way, it reveals the company's success at turning shareholder investments into profits.

View our latest analysis for Hamashbir 365

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Hamashbir 365 is:

6.2% = ₪4.9m ÷ ₪79m (Based on the trailing twelve months to September 2023).

The 'return' refers to a company's earnings over the last year. One way to conceptualize this is that for each ₪1 of shareholders' capital it has, the company made ₪0.06 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. 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.

Hamashbir 365's Earnings Growth And 6.2% ROE

On the face of it, Hamashbir 365's ROE is not much to talk about. However, its ROE is similar to the industry average of 6.7%, so we won't completely dismiss the company. Particularly, the exceptional 65% net income growth seen by Hamashbir 365 over the past five years is pretty remarkable. Taking into consideration that the ROE is not particularly high, we reckon that there could also be other factors at play which could be influencing the company's growth. Such as - high earnings retention or an efficient management in place.

We then compared Hamashbir 365'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 2.5% in the same 5-year 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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about Hamashbir 365's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Hamashbir 365 Using Its Retained Earnings Effectively?

The three-year median payout ratio for Hamashbir 365 is 27%, which is moderately low. The company is retaining the remaining 73%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Hamashbir 365 is reinvesting its earnings efficiently.

Along with seeing a growth in earnings, Hamashbir 365 only recently started paying dividends. Its quite possible that the company was looking to impress its shareholders.

Conclusion

In total, it does look like Hamashbir 365 has some positive aspects to its business. 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. Our risks dashboard would have the 3 risks we have identified for Hamashbir 365.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.