The fundamentals of Harel Insurance Investments & Financial Services Ltd (TLV:HARL) look quite solid: could the market be wrong about the stock?

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It’s hard to get excited after looking at the recent performance of Harel Insurance Investments & Financial Services (TLV:HARL), as its stock is down 9.3% in the past three months. However, a closer look at his healthy finances might make you think again. Since fundamentals generally determine long-term market outcomes, the company is worth looking into. In particular, we will pay attention to the ROE of Harel Insurance Investments & Financial Services today.

Return on equity or ROE is a key metric used to gauge how effectively a company’s management is using the company’s capital. In simpler terms, it measures a company’s profitability relative to equity.

See our latest analysis for Harel Insurance Investments & Financial Services

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for Harel Insurance Investments & Financial Services is:

18% = ₪1.6b ÷ ₪8.9b (Based on the last twelve months to March 2022).

The “yield” is the profit of the last twelve months. One way to conceptualize this is that for every ₪1 of share capital it has, the company has made a profit of 0.18₪.

What is the relationship between ROE and earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate compared to companies that don’t necessarily exhibit these characteristics.

Harel Insurance Investments & Financial Services earnings growth and 18% ROE

For starters, Harel Insurance Investments & Financial Services seems to have a respectable ROE. Additionally, the company’s ROE is similar to the industry average of 18%. This certainly adds some context to Harel Insurance Investments & Financial Services’ moderate 14% net profit growth seen over the past five years.

We then performed a comparison of Harel Insurance Investments & Financial Services’ net income growth with the industry, which revealed that the company’s growth is similar to the industry average growth of 14% over the same period.

TASE: HARL Past Earnings Growth June 30, 2022

Earnings growth is an important factor in stock valuation. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. This then helps them determine whether the action is placed for a bright or bleak future. A good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings outlook. Thus, you might want to check whether Harel Insurance Investments & Financial Services is trading on a high P/E or on a low P/E, relative to its sector.

Does Harel Insurance Investments & Financial Services use its profits effectively?

Harel Insurance Investments & Financial Services has a three-year median payout ratio of 34%, implying that it retains the remaining 66% of its profits. This suggests that its dividend is well covered and, given the decent growth the company has seen, it looks like management is reinvesting its earnings effectively.

Additionally, Harel Insurance Investments & Financial Services is committed to continuing to share its profits with shareholders, which we infer from its long history of paying dividends for at least ten years.

Summary

Overall, we believe the performance of Harel Insurance Investments & Financial Services has been quite good. In particular, it is good to see that the company is investing heavily in its business, and together with a high rate of return, this has led to significant growth in its profits. If the company continues to increase its earnings as it has, it could have a positive impact on its share price given how earnings per share influence prices over the long term. Remember that the price of a stock also depends on the perceived risk. Therefore, investors should be aware of the risks involved before investing in a company. To see the 1 risk we have identified for Harel Insurance Investments & Financial Services, visit our risk dashboard for free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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