Stock Analysis

E. Schnapp Works (TLV:SHNP) Is Looking To Continue Growing Its Returns On Capital

TASE:SHNP
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, E. Schnapp Works (TLV:SHNP) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for E. Schnapp Works:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.15 = ₪55m ÷ (₪551m - ₪177m) (Based on the trailing twelve months to June 2022).

So, E. Schnapp Works has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 6.1% generated by the Auto Components industry.

Our analysis indicates that SHNP is potentially undervalued!

roce
TASE:SHNP Return on Capital Employed November 4th 2022

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how E. Schnapp Works has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is E. Schnapp Works' ROCE Trending?

We're pretty happy with how the ROCE has been trending at E. Schnapp Works. The data shows that returns on capital have increased by 25% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 24% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Key Takeaway

From what we've seen above, E. Schnapp Works has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 37% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

On a separate note, we've found 2 warning signs for E. Schnapp Works you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether E. Schnapp Works is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.