Capital Allocation Trends At Bet Shemesh Engines Holdings (1997) (TLV:BSEN) Aren't Ideal

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Bet Shemesh Engines Holdings (1997) (TLV:BSEN), it didn't seem to tick all of these boxes.

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

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. Analysts use this formula to calculate it for Bet Shemesh Engines Holdings (1997):

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

0.054 = US$10m ÷ (US$261m - US$68m) (Based on the trailing twelve months to December 2020).

Thus, Bet Shemesh Engines Holdings (1997) has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 9.4%.

See our latest analysis for Bet Shemesh Engines Holdings (1997)

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 Bet Shemesh Engines Holdings (1997)'s past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Bet Shemesh Engines Holdings (1997)'s ROCE Trend?

In terms of Bet Shemesh Engines Holdings (1997)'s historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 5.4% from 13% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Key Takeaway

We're a bit apprehensive about Bet Shemesh Engines Holdings (1997) because despite more capital being deployed in the business, returns on that capital and sales have both fallen. However the stock has delivered a 54% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Bet Shemesh Engines Holdings (1997) does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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