Here's What To Make Of El-Mor Electric Installation & Services (1986)'s (TLV:ELMR) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after briefly looking over the numbers, we don't think El-Mor Electric Installation & Services (1986) (TLV:ELMR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. To calculate this metric for El-Mor Electric Installation & Services (1986), this is the formula:

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

0.14 = ₪20m ÷ (₪315m - ₪170m) (Based on the trailing twelve months to September 2020).

So, El-Mor Electric Installation & Services (1986) has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 10% it's much better.

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

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'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.

How Are Returns Trending?

In terms of El-Mor Electric Installation & Services (1986)'s historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 27%, but since then they've fallen to 14%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, El-Mor Electric Installation & Services (1986)'s current liabilities are still rather high at 54% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On El-Mor Electric Installation & Services (1986)'s ROCE

In summary, despite lower returns in the short term, we're encouraged to see that El-Mor Electric Installation & Services (1986) is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 1.8% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One final note, you should learn about the 4 warning signs we've spotted with El-Mor Electric Installation & Services (1986) (including 1 which is significant) .

While El-Mor Electric Installation & Services (1986) 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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