N.R. Spuntech Industries (TLV:SPNTC) has had a rough three months with its share price down 8.1%. However, the company’s fundamentals look pretty decent, and long-term financials are usually aligned with future market price movements. Specifically, we decided to study N.R. Spuntech Industries’ 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.
How Is ROE Calculated?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for N.R. Spuntech Industries is:
33% = ₪85m ÷ ₪256m (Based on the trailing twelve months to December 2020).
The ‘return’ is the yearly profit. Another way to think of that is that for every ₪1 worth of equity, the company was able to earn ₪0.33 in profit.
What Has ROE Got To Do With Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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 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.
N.R. Spuntech Industries’ Earnings Growth And 33% ROE
First thing first, we like that N.R. Spuntech Industries has an impressive ROE. Secondly, even when compared to the industry average of 11% the company’s ROE is quite impressive. Despite this, N.R. Spuntech Industries’ five year net income growth was quite flat over the past five years. We reckon that there could be some other factors at play here that’s limiting the company’s growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.
As a next step, we compared N.R. Spuntech Industries’ net income growth with the industry and discovered that the industry saw an average growth of 6.5% in the same period.
Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. If you’re wondering about N.R. Spuntech Industries”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.
Is N.R. Spuntech Industries Making Efficient Use Of Its Profits?
The high three-year median payout ratio of 70% (meaning, the company retains only 30% of profits) for N.R. Spuntech Industries suggests that the company’s earnings growth was miniscule as a result of paying out a majority of its earnings.
Moreover, N.R. Spuntech Industries has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.
In total, it does look like N.R. Spuntech Industries has some positive aspects to its business. However, while the company does have a high ROE, its earnings growth number is quite disappointing. This can be blamed on the fact that it reinvests only a small portion of its profits and pays out the rest as dividends. So far, we’ve only made a quick discussion around the company’s earnings growth. So it may be worth checking this free detailed graph of N.R. Spuntech Industries’ past earnings, as well as revenue and cash flows to get a deeper insight into the company’s performance.
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