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Does The Market Have A Low Tolerance For MIND C.T.I. Ltd's (NASDAQ:MNDO) Mixed Fundamentals?

Simply Wall St

It is hard to get excited after looking at MIND C.T.I's (NASDAQ:MNDO) recent performance, when its stock has declined 33% over the past three months. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Stock prices are usually driven by a company’s financial performance over the long term, and therefore we decided to pay more attention to the company's financial performance. Particularly, we will be paying attention to MIND C.T.I's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

See our latest analysis for MIND C.T.I

How Is ROE Calculated?

ROE 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 MIND C.T.I is:

23% = US$5.1m ÷ US$22m (Based on the trailing twelve months to December 2019).

The 'return' refers to a company's earnings over the last year. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.23.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. 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.

MIND C.T.I's Earnings Growth And 23% ROE

First thing first, we like that MIND C.T.I has an impressive ROE. Additionally, the company's ROE is higher compared to the industry average of 12% which is quite remarkable. Given the circumstances, we can't help but wonder why MIND C.T.I saw little to no growth in the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

We then compared MIND C.T.I's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 24% in the same period, which is a bit concerning.

NasdaqGM:MNDO Past Earnings Growth May 11th 2020

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. Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about MIND C.T.I's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is MIND C.T.I Using Its Retained Earnings Effectively?

MIND C.T.I has a very high three-year median payout ratio of 103% over the last last three years, which suggests that the company is dipping into more than just its earnings to pay its dividend. The absence in growth is therefore not surprising. Paying a dividend higher than reported profits is not a sustainable move. This is quite a risky position to be in. To know the 3 risks we have identified for MIND C.T.I visit our risks dashboard for free.

Moreover, MIND C.T.I has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth.

Conclusion

In total, we're a bit ambivalent about MIND C.T.I's performance. In spite of the high ROE, the company has failed to see growth in its earnings due to it paying out most of its profits as dividend, with almost nothing left to invest into its own business. Up till now, we've only made a short study of the company's growth data. You can do your own research on MIND C.T.I and see how it has performed in the past by looking at this FREE detailed graph of past earnings, revenue and cash flows.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.