Are Duniec Bros. Ltd’s (TLV:DUNI) Mixed Financials The Reason For Its Gloomy Performance on The Stock Market?

With its stock down 11% over the past three months, it is easy to disregard Duniec Bros (TLV:DUNI). We, however decided to study the company’s financials to determine if they have got anything to do with the price decline. Long-term fundamentals are usually what drive market outcomes, so it’s worth paying close attention. Particularly, we will be paying attention to Duniec Bros’ 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.

View our latest analysis for Duniec Bros

How Do You Calculate Return On Equity?

Return on equity 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 Duniec Bros is:

6.9% = ₪70m ÷ ₪1.0b (Based on the trailing twelve months to September 2022).

The ‘return’ refers to a company’s earnings over the last year. That means that for every ₪1 worth of shareholders’ equity, the company generated ₪0.07 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. 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.

Duniec Bros’ Earnings Growth And 6.9% ROE

When you first look at it, Duniec Bros’ ROE doesn’t look that attractive. A quick further study shows that the company’s ROE doesn’t compare favorably to the industry average of 11% either. Duniec Bros was still able to see a decent net income growth of 9.4% over the past five years. So, the growth in the company’s earnings could probably have been caused by other variables. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Duniec Bros’ net income growth with the industry and were disappointed to see that the company’s growth is lower than the industry average growth of 20% in the same period.

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. 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 Duniec Bros”s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Duniec Bros Efficiently Re-investing Its Profits?

The high three-year median payout ratio of 52% (or a retention ratio of 48%) for Duniec Bros suggests that the company’s growth wasn’t really hampered despite it returning most of its income to its shareholders.

Besides, Duniec Bros 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 have mixed feelings about Duniec Bros. Although the company has shown a fair bit of growth in earnings, the reinvestment rate is low. Meaning, the earnings growth number could have been significantly higher had the company been retaining more of its profits and reinvesting that at a higher rate of return. Until now, we have only just grazed the surface of the company’s past performance by looking at the company’s fundamentals. So it may be worth checking this free detailed graph of Duniec Bros’ past earnings, as well as revenue and cash flows to get a deeper insight into the company’s performance.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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.