Investors Met With Slowing Returns on Capital At Ashtrom Group (TLV:ASHG)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Ashtrom Group (TLV:ASHG), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Ashtrom Group is:

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

0.05 = ₪554m ÷ (₪15b - ₪4.0b) (Based on the trailing twelve months to March 2021).

So, Ashtrom Group has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.3%.

See our latest analysis for Ashtrom Group

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 Ashtrom Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Ashtrom Group's ROCE Trend?

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 5.0% and the business has deployed 64% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On Ashtrom Group's ROCE

In conclusion, Ashtrom Group has been investing more capital into the business, but returns on that capital haven't increased. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 792% 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.

One more thing: We've identified 3 warning signs with Ashtrom Group (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

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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