Returns On Capital Are Showing Encouraging Signs At Kvutzat Acro (TLV:ACRO)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Kvutzat Acro's (TLV:ACRO) returns on capital, so let's have a look.

Understanding 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. The formula for this calculation on Kvutzat Acro is:

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

0.022 = ₪113m ÷ (₪6.3b - ₪1.1b) (Based on the trailing twelve months to December 2023).

Thus, Kvutzat Acro has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.9%.

View our latest analysis for Kvutzat Acro

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kvutzat Acro's ROCE against it's prior returns. If you're interested in investigating Kvutzat Acro's past further, check out this free graph covering Kvutzat Acro's past earnings, revenue and cash flow.

The Trend Of ROCE

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last two years, returns on capital employed have risen substantially to 2.2%. The amount of capital employed has increased too, by 100%. So we're very much inspired by what we're seeing at Kvutzat Acro thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 18%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Kvutzat Acro has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Kvutzat Acro's ROCE

All in all, it's terrific to see that Kvutzat Acro is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 28% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know more about Kvutzat Acro, we've spotted 3 warning signs, and 2 of them are a bit unpleasant.

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.

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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.