Is Ralco Agencies Ltd's (TLV:RLCO) Recent Stock Performance Influenced By Its Fundamentals In Any Way?

Ralco Agencies' (TLV:RLCO) stock is up by a considerable 14% over the past week. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Ralco Agencies' ROE today.

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 simpler terms, it measures the profitability of a company in relation to shareholder's equity.

This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality.

How Do You Calculate Return On Equity?

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 Ralco Agencies is:

32% = ₪33m ÷ ₪103m (Based on the trailing twelve months to March 2025).

The 'return' is the yearly profit. So, this means that for every ₪1 of its shareholder's investments, the company generates a profit of ₪0.32.

See our latest analysis for Ralco Agencies

What Is The Relationship Between ROE And Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. 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.

Ralco Agencies' Earnings Growth And 32% ROE

Firstly, we acknowledge that Ralco Agencies has a significantly high ROE. Additionally, the company's ROE is higher compared to the industry average of 6.2% which is quite remarkable. However, for some reason, the higher returns aren't reflected in Ralco Agencies' meagre five year net income growth average of 4.5%. That's a bit unexpected from a company which has such a high rate of return. A few likely reasons why this could happen is that the company could have a high payout ratio or the business has allocated capital poorly, for instance.

Next, on comparing with the industry net income growth, we found that Ralco Agencies' reported growth was lower than the industry growth of 18% over the last few years, which is not something we like to see.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is Ralco Agencies fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Ralco Agencies Making Efficient Use Of Its Profits?

The high three-year median payout ratio of 82% (that is, the company retains only 18% of its income) over the past three years for Ralco Agencies suggests that the company's earnings growth was lower as a result of paying out a majority of its earnings.

Moreover, Ralco Agencies has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

Overall, we feel that Ralco Agencies certainly does have some positive factors to consider. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. 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. You can see the 3 risks we have identified for Ralco Agencies by visiting our risks dashboard for free on our platform here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.