Is the recent performance of Zanlakol Ltd (TLV:ZNKL) shares influenced by its fundamentals in any way?

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Zanlakol (TLV:ZNKL) has had a strong run in the equity market with a significant 12% rise in its shares over the past month. As most know, fundamentals are what generally guide market price movements over the long term, so we decided to take a look at key financial indicators in business today to see if they have a role to play. play in the recent price movement. In this article, we decided to focus on the ROE of Zanlakol.

ROE or return on equity is a useful tool for evaluating how effectively a company can generate returns on the investment it has received from its shareholders. In other words, it is a profitability ratio that measures the rate of return on capital contributed by the company’s shareholders.

See our latest review for Zanlakol

How is ROE calculated?

The ROE formula is:

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

So, based on the formula above, the ROE for Zanlakol is:

16% = ₪20m ÷ ₪129m (Based on last twelve months to March 2022).

“Yield” is the income the business has earned over the past year. One way to conceptualize this is that for every ₪1 of share capital it has, the company has made a profit of 0.16₪.

Why is ROE important for earnings growth?

We have already established that ROE serves as an effective profit-generating indicator for a company’s future earnings. 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 all else is equal, companies that have both a higher return on equity and better earnings retention are generally the ones with a higher growth rate compared to companies that don’t. same characteristics.

Zanlakol earnings growth and ROE of 16%

For starters, Zanlakol seems to have a respectable ROE. Even when compared to the industry average of 17%, the company’s ROE looks pretty decent. As you might expect, the 4.2% drop in net income reported by Zanlakol is a bit of a surprise. Based on this, we believe that there might be other reasons which have not been discussed so far in this article which might hinder the growth of the business. For example, the company may have a high payout ratio or the company may have misallocated capital, for example.

So, in a next step, we compared the performance of Zanlakol to that of the industry and were disappointed to find that while the company reduced its profits, the industry increased its profits at a rate of 4.4 % over the same period.

TASE: ZNKL Past Earnings Growth August 2, 2022

The basis for attaching value to a company is, to a large extent, linked to the growth of its profits. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about Zanlakol’s valuation, check out this indicator of its price-earnings ratio, relative to its industry.

Does Zanlakol effectively use its benefits?

With a high three-year median payout ratio of 71% (implying that 29% of profits are retained), most of Zanlakol’s profits are paid out to shareholders, which explains the company’s declining profits. The company has only a small pool of capital left to reinvest – A vicious cycle that does not benefit the company in the long term. You can see the 4 risks we have identified for Zanlakol by visiting our risk dashboard for free on our platform here.

Additionally, Zanlakol has been paying dividends for at least a decade, suggesting that management must have perceived that shareholders preferred dividends to earnings growth.

Conclusion

All in all, it seems that Zanlakol has positive aspects for its activity. Still, the weak earnings growth is a bit of a concern, especially since the company has a high rate of return. Investors could have benefited from the high ROE had the company reinvested more of its earnings. As mentioned earlier, the company retains a small portion of its profits. So far, we have only made a short study of the company’s growth data. You can do your own research on Zanlakol and see how it has worked in the past by watching this FREE detailed graph past profits, revenue and cash flow.

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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