CI Systems (Israel) Ltd.'s (TLV:CISY) Stock Has Been Sliding But Fundamentals Look Strong: Is The Market Wrong?

CI Systems (Israel) (TLV:CISY) has had a rough week with its share price down 11%. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. Specifically, we decided to study CI Systems (Israel)'s ROE in this article.

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.

View our latest analysis for CI Systems (Israel)

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 CI Systems (Israel) is:

20% = US$5.0m ÷ US$25m (Based on the trailing twelve months to December 2023).

The 'return' is the yearly profit. That means that for every ₪1 worth of shareholders' equity, the company generated ₪0.20 in profit.

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. 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.

CI Systems (Israel)'s Earnings Growth And 20% ROE

To begin with, CI Systems (Israel) seems to have a respectable ROE. On comparing with the average industry ROE of 8.2% the company's ROE looks pretty remarkable. This certainly adds some context to CI Systems (Israel)'s exceptional 49% 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. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

Next, on comparing with the industry net income growth, we found that CI Systems (Israel)'s growth is quite high when compared to the industry average growth of 17% in the same period, which is great to see.

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. Doing so will help them establish if the stock's future looks promising or ominous. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if CI Systems (Israel) is trading on a high P/E or a low P/E, relative to its industry.

Is CI Systems (Israel) Using Its Retained Earnings Effectively?

CI Systems (Israel)'s three-year median payout ratio is a pretty moderate 31%, meaning the company retains 69% of its income. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like CI Systems (Israel) is reinvesting its earnings efficiently.

Additionally, CI Systems (Israel) has paid dividends over a period of three years which means that the company is pretty serious about sharing its profits with shareholders.

Summary

In total, we are pretty happy with CI Systems (Israel)'s performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 1 risk we have identified for CI Systems (Israel) by visiting our risks dashboard for free on our platform here.

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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.