Stock Analysis

Do Its Financials Have Any Role To Play In Driving Overseas Commerce Ltd.'s (TLV:OVRS) Stock Up Recently?

TASE:OVRS
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Overseas Commerce's (TLV:OVRS) stock is up by a considerable 55% over the past three months. 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. Specifically, we decided to study Overseas Commerce's ROE in this article.

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 other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for Overseas Commerce

How Is ROE Calculated?

Return on equity 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 Overseas Commerce is:

12% = ₪23m ÷ ₪196m (Based on the trailing twelve months to September 2020).

The 'return' refers to a company's earnings over the last year. That means that for every ₪1 worth of shareholders' equity, the company generated ₪0.12 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. 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.

Overseas Commerce's Earnings Growth And 12% ROE

To start with, Overseas Commerce's ROE looks acceptable. On comparing with the average industry ROE of 5.7% the company's ROE looks pretty remarkable. As you might expect, the 3.8% net income decline reported by Overseas Commerce is a bit of a surprise. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. These include low earnings retention or poor allocation of capital.

That being said, we compared Overseas Commerce's performance with the industry and were concerned when we found that while the company has shrunk its earnings, the industry has grown its earnings at a rate of 3.0% in the same period.

past-earnings-growth
TASE:OVRS Past Earnings Growth December 26th 2020

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). Doing so will help them establish if the stock's future looks promising or ominous. Is Overseas Commerce fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Overseas Commerce Using Its Retained Earnings Effectively?

While the company did payout a portion of its dividend in the past, it currently doesn't pay a dividend. This implies that potentially all of its profits are being reinvested in the business.

Conclusion

In total, it does look like Overseas Commerce has some positive aspects to its business. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. 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. To know the 5 risks we have identified for Overseas Commerce visit our risks dashboard for free.

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