The Trends At Arad Investment & Industrial Development (TLV:ARAD) That You Should Know About

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Arad Investment & Industrial Development (TLV:ARAD) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Arad Investment & Industrial Development is:

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

0.051 = ₪398m ÷ (₪9.0b - ₪1.1b) (Based on the trailing twelve months to June 2020).

Therefore, Arad Investment & Industrial Development has an ROCE of 5.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.5%.

View our latest analysis for Arad Investment & Industrial Development

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're interested in investigating Arad Investment & Industrial Development's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Arad Investment & Industrial Development's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.5%, but since then they've fallen to 5.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Arad Investment & Industrial Development has decreased its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Arad Investment & Industrial Development's ROCE

In summary, we're somewhat concerned by Arad Investment & Industrial Development's diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 187%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 2 warning signs we've spotted with Arad Investment & Industrial Development (including 1 which is can't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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. 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.
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