E.S. Australia Israel Holdings (TLV:AUIS) Is Looking To Continue Growing Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in E.S. Australia Israel Holdings' (TLV:AUIS) returns on capital, so let's have a look.

Understanding 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. To calculate this metric for E.S. Australia Israel Holdings, this is the formula:

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

0.014 = ₪2.6m ÷ (₪203m - ₪21m) (Based on the trailing twelve months to December 2023).

So, E.S. Australia Israel Holdings has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 8.2%.

View our latest analysis for E.S. Australia Israel Holdings

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

How Are Returns Trending?

We're delighted to see that E.S. Australia Israel Holdings is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 1.4% which is a sight for sore eyes. In addition to that, E.S. Australia Israel Holdings is employing 134% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In Conclusion...

Overall, E.S. Australia Israel Holdings gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 43% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

E.S. Australia Israel Holdings does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While E.S. Australia Israel Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.