Capital Allocation Trends At Aryt Industries (TLV:ARYT) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Aryt Industries (TLV:ARYT), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Aryt Industries:

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

0.22 = ₪15m ÷ (₪83m - ₪15m) (Based on the trailing twelve months to December 2020).

So, Aryt Industries has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 9.4% earned by companies in a similar industry.

Check out our latest analysis for Aryt Industries

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

The Trend Of ROCE

When we looked at the ROCE trend at Aryt Industries, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 32% where it was five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

Our Take On Aryt Industries' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Aryt Industries have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 159%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we found 5 warning signs for Aryt Industries (2 can't be ignored) you should be aware of.

Aryt Industries is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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