Returns On Capital Signal Tricky Times Ahead For Ashtrom Group (TLV:ASHG)

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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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. Analysts use this formula to calculate it for Ashtrom Group:

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

0.03 = ₪509m ÷ (₪21b - ₪4.5b) (Based on the trailing twelve months to March 2024).

Thus, Ashtrom Group has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.0%.

See our latest analysis for Ashtrom Group

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 covering Ashtrom Group's past earnings, revenue and cash flow.

What Does the ROCE Trend For Ashtrom Group Tell Us?

On the surface, the trend of ROCE at Ashtrom Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 3.0% from 5.6% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Ashtrom Group has decreased its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that Ashtrom Group is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 104% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know more about Ashtrom Group, we've spotted 2 warning signs, and 1 of them is concerning.

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. 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.

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