The Returns On Capital At Rav-Bariach (08) Industries (TLV:BRIH) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. However, after briefly looking over the numbers, we don't think Rav-Bariach (08) Industries (TLV:BRIH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Rav-Bariach (08) Industries, this is the formula:

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

0.062 = ₪36m ÷ (₪1.1b - ₪551m) (Based on the trailing twelve months to September 2023).

Thus, Rav-Bariach (08) Industries has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Building industry average of 9.6%.

View our latest analysis for Rav-Bariach (08) Industries

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 Rav-Bariach (08) Industries' past further, check out this free graph covering Rav-Bariach (08) Industries' past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Rav-Bariach (08) Industries, we didn't gain much confidence. Around three years ago the returns on capital were 12%, but since then they've fallen to 6.2%. However it looks like Rav-Bariach (08) Industries might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Rav-Bariach (08) Industries has done well to pay down its current liabilities to 48% of total assets. That could partly explain why the ROCE has dropped. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

Our Take On Rav-Bariach (08) Industries' ROCE

In summary, Rav-Bariach (08) Industries is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has declined 11% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Rav-Bariach (08) Industries has the makings of a multi-bagger.

On a final note, we found 4 warning signs for Rav-Bariach (08) Industries (2 are a bit unpleasant) you should be aware of.

While Rav-Bariach (08) Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.