The Returns On Capital At Elspec Engineering (TLV:ELSPC) Don't Inspire Confidence

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Elspec Engineering (TLV:ELSPC) 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 Elspec Engineering is:

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

0.08 = ₪5.6m ÷ (₪84m - ₪15m) (Based on the trailing twelve months to December 2020).

Therefore, Elspec Engineering has an ROCE of 8.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.2%.

View our latest analysis for Elspec Engineering

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 want to delve into the historical earnings, revenue and cash flow of Elspec Engineering, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at Elspec Engineering doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 8.0%. 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.

The Bottom Line On Elspec Engineering's ROCE

In summary, we're somewhat concerned by Elspec Engineering's diminishing returns on increasing amounts of capital. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 3 warning signs with Elspec Engineering and understanding these should be part of your investment process.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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