Are Strong Financial Prospects The Force That Is Driving The Momentum In Menora Mivtachim Holdings Ltd's TLV:MMHD) Stock?

Simply Wall St · 10/16 04:05

Menora Mivtachim Holdings (TLV:MMHD) has had a great run on the share market with its stock up by a significant 12% over the last three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. Specifically, we decided to study Menora Mivtachim Holdings' ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Menora Mivtachim Holdings

How Do You Calculate Return On Equity?

The formula for return on equity is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Menora Mivtachim Holdings is:

14% = ₪985m ÷ ₪6.9b (Based on the trailing twelve months to June 2024).

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 ₪0.14 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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. 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 Menora Mivtachim Holdings' Earnings Growth And 14% ROE

At first glance, Menora Mivtachim Holdings seems to have a decent ROE. Further, the company's ROE is similar to the industry average of 14%. Consequently, this likely laid the ground for the decent growth of 11% seen over the past five years by Menora Mivtachim Holdings.

As a next step, we compared Menora Mivtachim Holdings' net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 14% in the same period.

past-earnings-growth
TASE:MMHD Past Earnings Growth October 16th 2024

Earnings growth is a huge factor in stock valuation. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. Is Menora Mivtachim Holdings fairly valued compared to other companies? These 3 valuation measures might help you decide.

Is Menora Mivtachim Holdings Using Its Retained Earnings Effectively?

Menora Mivtachim Holdings has a healthy combination of a moderate three-year median payout ratio of 32% (or a retention ratio of 68%) 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, Menora Mivtachim Holdings has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders.

Conclusion

Overall, we are quite pleased with Menora Mivtachim Holdings' performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. As a result, the decent growth in its earnings is not surprising. 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. Remember, the price of a stock is also dependent on the perceived risk. Therefore investors must keep themselves informed about the risks involved before investing in any company. You can see the 1 risk we have identified for Menora Mivtachim Holdings by visiting our risks dashboard for free on our platform here.