G. Willi-Food International Ltd.'s (NASDAQ:WILC) On An Uptrend But Financial Prospects Look Pretty Weak: Is The Stock Overpriced?
G. Willi-Food International's (NASDAQ:WILC) stock is up by a considerable 10% over the past three months. We, however wanted to have a closer look at its key financial indicators as the markets usually pay for long-term fundamentals, and in this case, they don't look very promising. Specifically, we decided to study G. Willi-Food International's ROE in this article.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. 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 G. Willi-Food International
How Do You Calculate Return On Equity?
The formula for ROE is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for G. Willi-Food International is:
6.2% = ₪34m ÷ ₪541m (Based on the trailing twelve months to September 2023).
The 'return' is the yearly profit. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.06 in profit.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.
G. Willi-Food International's Earnings Growth And 6.2% ROE
When you first look at it, G. Willi-Food International's ROE doesn't look that attractive. Next, when compared to the average industry ROE of 15%, the company's ROE leaves us feeling even less enthusiastic. Hence, the flat earnings seen by G. Willi-Food International over the past five years could probably be the result of it having a lower ROE.
Next, on comparing with the industry net income growth, we found that G. Willi-Food International's reported growth was lower than the industry growth of 14% over the last few years, which is not something we like to see.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. Is G. Willi-Food International fairly valued compared to other companies? These 3 valuation measures might help you decide.
Is G. Willi-Food International Using Its Retained Earnings Effectively?
G. Willi-Food International has a three-year median payout ratio as high as 153% meaning that the company is paying a dividend which is beyond its means. The absence in growth is therefore not surprising. Its usually very hard to sustain dividend payments that are higher than reported profits. That's a huge risk in our books.
In addition, G. Willi-Food International has been paying dividends over a period of seven years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth.
Conclusion
Overall, we would be extremely cautious before making any decision on G. Willi-Food International. The low ROE, combined with the fact that the company is paying out almost if not all, of its profits as dividends, has resulted in the lack or absence of growth in its earnings. Up till now, we've only made a short study of the company's growth data. To gain further insights into G. Willi-Food International's past profit growth, check out this visualization of past earnings, revenue and cash flows.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
