Almogim Holdings Ltd. (TLV: ALMA) Is There A High Quality Stock To Own?
Many investors are still educating themselves about the various metrics that can be useful when analyzing a stock. This article is for those who want to learn more about return on equity (ROE). We will use the ROE to review Almogim Holdings Ltd. (TLV: ALMA), using a concrete example.
Return on equity or ROE is a key metric used to assess the efficiency with which the management of a business is using business capital. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the shareholders of the company.
See our latest analysis for Almogim Holdings
How to calculate return on equity?
the return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, on the basis of the above formula, the ROE of Almogim Holdings is:
24% = ₪ 42m ₪ 172m (Based on the last twelve months up to September 2021).
The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every 1 of share capital it has, the company has made 0.24 profit.
Does Almogim Holdings have a good ROE?
An easy way to determine if a company has a good return on equity is to compare it to the average in its industry. The limitation of this approach is that some companies are very different from others, even within the same industry classification. As shown in the image below, Almogim Holdings has a better ROE than the real estate industry average (11%).
This is what we love to see. That said, a high ROE doesn’t always indicate high profitability. A higher proportion of debt in a company’s capital structure can also result in high ROE, where high debt levels could represent a huge risk. Our risk dashboard should include the 3 risks that we have identified for Almogim Holdings.
The importance of debt to return on equity
Most businesses need money – from somewhere – to increase their profits. This liquidity can come from the issuance of shares, retained earnings or debt. In the first and second cases, the ROE will reflect this use of cash for investing in the business. In the latter case, the debt used for growth will improve returns, but will not affect total equity. In this way, the use of debt will increase the ROE, even if the basic economy of the business remains the same.
Almogim Holdings’ debt and its ROE of 24%
Noteworthy is the high reliance on debt by Almogim Holdings, leading to its debt-to-equity ratio of 2.27. While there is no doubt that its ROE is impressive, we would have been even more impressed if the company had achieved this goal with lower debt. Leverage increases risk and reduces options for the business in the future, so you usually want to get good returns using it.
Return on equity is a useful indicator of a company’s ability to generate profits and return them to shareholders. In our books, the highest quality companies have a high return on equity, despite low leverage. If two companies have the same ROE, I would generally prefer the one with the least amount of debt.
That said, while ROE is a useful indicator of how good a business is, you’ll need to look at a whole range of factors to determine the right price to buy a stock. It is important to take into account other factors, such as future profit growth and the amount of investment required for the future. You can see how the business has grown in the past by checking out this FREE detailed graphic past earnings, income and cash flow.
If you would rather consult with another company – one with potentially superior finances – then don’t miss this free list of interesting companies, which have a HIGH return on equity and low leverage.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.