Is Formula Systems (1985) Ltd.'s (TLV:FORTY) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

Formula Systems (1985) (TLV:FORTY) has had a great run on the share market with its stock up by a significant 7.7% over the last month. 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 Formula Systems (1985)'s ROE.

Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Formula Systems (1985)

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 Formula Systems (1985) is:

13% = US$183m ÷ US$1.4b (Based on the trailing twelve months to September 2024).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each ₪1 of shareholders' capital it has, the company made ₪0.13 in profit.

What Has ROE Got To Do With 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Formula Systems (1985)'s Earnings Growth And 13% ROE

At first glance, Formula Systems (1985) seems to have a decent ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 15%. This certainly adds some context to Formula Systems (1985)'s moderate 13% net income growth seen over the past five years.

Next, on comparing Formula Systems (1985)'s net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 13% over the last few years.

Earnings growth is an important metric to consider when valuing a stock. 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 Formula Systems (1985) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Formula Systems (1985) Efficiently Re-investing Its Profits?

Formula Systems (1985) has a healthy combination of a moderate three-year median payout ratio of 26% (or a retention ratio of 74%) and a respectable amount of growth in earnings as we saw above, meaning that the company has been making efficient use of its profits.

Besides, Formula Systems (1985) has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Summary

Overall, we are quite pleased with Formula Systems (1985)'s performance. 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.

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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.