Returns On Capital Tell Us A Lot About Averbuch Formica Center (TLV:AVER)

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Averbuch Formica Center (TLV:AVER), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Averbuch Formica Center is:

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

0.0014 = ₪126k ÷ (₪105m - ₪15m) (Based on the trailing twelve months to June 2020).

Thus, Averbuch Formica Center has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 6.8%.

View our latest analysis for Averbuch Formica Center

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're interested in investigating Averbuch Formica Center's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Averbuch Formica Center, given the returns are trending downwards. To be more specific, the ROCE was 2.2% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Averbuch Formica Center to turn into a multi-bagger.

On a side note, Averbuch Formica Center has done well to pay down its current liabilities to 15% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Averbuch Formica Center's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Averbuch Formica Center (including 1 which shouldn't be ignored) .

While Averbuch Formica Center isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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