Are Robust Financials Driving The Recent Rally In Unitronics (1989) (R"G) Ltd's (TLV:UNIT) Stock?

Unitronics (1989) (RG)'s (TLV:UNIT) stock is up by a considerable 44% over the past three months. 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. Specifically, we decided to study Unitronics (1989) (RG)'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. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for Unitronics (1989) (RG)

How Is ROE Calculated?

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 Unitronics (1989) (RG) is:

18% = ₪12m ÷ ₪69m (Based on the trailing twelve months to September 2020).

The 'return' is the income the business earned over the last year. That means that for every ₪1 worth of shareholders' equity, the company generated ₪0.18 in profit.

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.

Unitronics (1989) (RG)'s Earnings Growth And 18% ROE

To begin with, Unitronics (1989) (RG) seems to have a respectable ROE. Further, the company's ROE compares quite favorably to the industry average of 9.3%. This certainly adds some context to Unitronics (1989) (RG)'s exceptional 37% net income growth seen over the past five years. We reckon that there could also be other factors at play here. 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.

We then compared Unitronics (1989) (RG)'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 14% in the same period.

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). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is Unitronics (1989) (RG) fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Unitronics (1989) (RG) Making Efficient Use Of Its Profits?

Summary

In total, we are pretty happy with Unitronics (1989) (RG)'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. 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. You can see the 2 risks we have identified for Unitronics (1989) (RG) 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. 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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