Inter Gamma Investment Company Ltd's (TLV:INTR) Stock's On An Uptrend: Are Strong Financials Guiding The Market?

Inter Gamma Investment's (TLV:INTR) stock is up by a considerable 30% over the past three months. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. Particularly, we will be paying attention to Inter Gamma Investment's ROE today.

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 Inter Gamma Investment

How Do You 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 Inter Gamma Investment is:

10% = ₪3.9m ÷ ₪39m (Based on the trailing twelve months to June 2020).

The 'return' is the profit over the last twelve months. So, this means that for every ₪1 of its shareholder's investments, the company generates a profit of ₪0.10.

Why Is ROE Important For Earnings Growth?

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

Inter Gamma Investment's Earnings Growth And 10% ROE

To begin with, Inter Gamma Investment seems to have a respectable ROE. And on comparing with the industry, we found that the the average industry ROE is similar at 9.3%. This probably goes some way in explaining Inter Gamma Investment's moderate 17% growth over the past five years amongst other factors.

As a next step, we compared Inter Gamma Investment's net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 14%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. 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 Inter Gamma Investment's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Inter Gamma Investment Using Its Retained Earnings Effectively?

Inter Gamma Investment doesn't pay any dividend, meaning that all of its profits are being reinvested in the business, which explains the fair bit of earnings growth the company has seen.

Conclusion

On the whole, we feel that Inter Gamma Investment's performance has been quite good. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. 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. Not to forget, share price outcomes are also dependent on the potential risks a company may face. So it is important for investors to be aware of the risks involved in the business. Our risks dashboard would have the 2 risks we have identified for Inter Gamma Investment.

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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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