Sunflower Sustainable Investments Ltd's (TLV:SNFL) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

Sunflower Sustainable Investments (TLV:SNFL) has had a great run on the share market with its stock up by a significant 20% over the last three months. Given that stock prices are usually aligned with a company's financial performance in the long-term, we decided to study its financial indicators more closely to see if they had a hand to play in the recent price move. Particularly, we will be paying attention to Sunflower Sustainable Investments' ROE today.

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 Sunflower Sustainable Investments

How To Calculate Return On Equity?

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 Sunflower Sustainable Investments is:

1.9% = ₪4.5m ÷ ₪234m (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 ₪0.02.

Why Is ROE Important For Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

A Side By Side comparison of Sunflower Sustainable Investments' Earnings Growth And 1.9% ROE

It is hard to argue that Sunflower Sustainable Investments' ROE is much good in and of itself. Even when compared to the industry average of 5.0%, the ROE figure is pretty disappointing. In spite of this, Sunflower Sustainable Investments was able to grow its net income considerably, at a rate of 34% in the last five years. Therefore, there could be other reasons behind this growth. Such as - high earnings retention or an efficient management in place.

We then performed a comparison between Sunflower Sustainable Investments' net income growth with the industry, which revealed that the company's growth is similar to the average industry growth of 34% in the same period.

Earnings growth is a huge factor in stock valuation. 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 Sunflower Sustainable Investments fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Sunflower Sustainable Investments Efficiently Re-investing Its Profits?

Sunflower Sustainable Investments doesn't pay any dividend currently which essentially means that it has been reinvesting all of its profits into the business. This definitely contributes to the high earnings growth number that we discussed above.

Summary

In total, it does look like Sunflower Sustainable Investments has some positive aspects to its business. With a high rate of reinvestment, albeit at a low ROE, the company has managed to see a considerable growth in its earnings. 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. Our risks dashboard would have the 3 risks we have identified for Sunflower Sustainable Investments.

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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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