Be Wary Of El-Mor Electric Installation & Services (1986) (TLV:ELMR) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Having said that, from a first glance at El-Mor Electric Installation & Services (1986) (TLV:ELMR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on El-Mor Electric Installation & Services (1986) is:

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

0.088 = ₪23m ÷ (₪441m - ₪186m) (Based on the trailing twelve months to December 2021).

Thus, El-Mor Electric Installation & Services (1986) has an ROCE of 8.8%. On its own, that's a low figure but it's around the 7.4% average generated by the Construction industry.

Check out our latest analysis for El-Mor Electric Installation & Services (1986)

Historical performance is a great place to start when researching a stock so above you can see the gauge for El-Mor Electric Installation & Services (1986)'s ROCE against it's prior returns. If you'd like to look at how El-Mor Electric Installation & Services (1986) has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at El-Mor Electric Installation & Services (1986), we didn't gain much confidence. Around five years ago the returns on capital were 31%, but since then they've fallen to 8.8%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, El-Mor Electric Installation & Services (1986) has decreased its current liabilities to 42% 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. Keep in mind 42% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

In summary, we're somewhat concerned by El-Mor Electric Installation & Services (1986)'s diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 141% over the last three years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to know some of the risks facing El-Mor Electric Installation & Services (1986) we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

While El-Mor Electric Installation & Services (1986) 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.