Could the market be wrong about Spring Ventures Ltd (TLV:SPRG) given its attractive financial outlook?

It’s hard to get excited after watching the recent performance of Spring Ventures (TLV:SPRG), as its stock is down 20% in the past three months. However, stock prices are usually determined by a company’s long-term financial performance, which in this case looks quite promising. In this article, we decided to focus on the ROE of Spring Ventures.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. 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 analysis for Spring Ventures

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 Spring Ventures is:

42% = ₪53m ÷ ₪127m (Based on last twelve months to December 2021).

“Yield” is the income the business has earned over the past year. This means that for every ₪1 of equity, the company generated 0.42₪ of profit.

Why is ROE important for earnings growth?

So far, we have learned that ROE measures how efficiently a company generates its profits. We now need to assess how much profit the company is reinvesting or “retaining” for future growth, which then gives us an idea of ​​the company’s growth potential. Generally speaking, all things being equal, companies with high return on equity and earnings retention have a higher growth rate than companies that do not share these attributes.

Spring Ventures earnings growth and 42% ROE

First of all, we love that Spring Ventures has an impressive ROE. Second, a comparison with the average industry-reported ROE of 13% also does not go unnoticed for us. So, the substantial 35% net income growth observed by Spring Ventures over the past five years is not too surprising.

We then compared Spring Ventures’ net income growth with the industry and we are happy to see that the growth figure for the company is higher compared to the industry which has a growth rate of 20% in during the same period.

TASE: SPRG Prior Earnings Growth as of May 30, 2022

Earnings growth is an important factor in stock valuation. It is important for an investor to know whether the market has priced in the expected growth (or decline) in the company’s earnings. This then helps them determine if the stock is positioned for a bright or bleak future. If you’re wondering about Spring Ventures’ valuation, check out this indicator of its price-earnings ratio, relative to its sector.

Does Spring Ventures Use Retained Earnings Effectively?

Since Spring Ventures does not pay any dividends to its shareholders, we infer that the company has reinvested all of its profits to grow its business.

Conclusion

Overall, we believe Spring Ventures’ performance has been quite good. In particular, we appreciate the fact that the company is reinvesting heavily in its business, and at a high rate of return. Unsurprisingly, this led to impressive earnings growth. If the company continues to increase 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. Let’s not forget that business risk is also one of the factors that affect the stock price. This is therefore also an important area for investors to pay attention to before making a decision on a company. You can see the 3 risks we have identified for Spring Ventures by visiting our risk dashboard for free on our platform here.

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.