If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Ashtrom Group (TLV:ASHG) and its ROCE trend, we weren't exactly thrilled.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Ashtrom Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = ₪511m ÷ (₪15b - ₪4.2b) (Based on the trailing twelve months to September 2021).
Therefore, Ashtrom Group has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.4%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Ashtrom Group's ROCE against it's prior returns. If you're interested in investigating Ashtrom Group's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Ashtrom Group Tell Us?
There are better returns on capital out there than what we're seeing at Ashtrom Group. Over the past five years, ROCE has remained relatively flat at around 4.6% and the business has deployed 61% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line
As we've seen above, Ashtrom Group's returns on capital haven't increased but it is reinvesting in the business. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 951% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Ashtrom Group (of which 1 makes us a bit uncomfortable!) that you should 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.
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.