Returns On Capital At Electra (TLV:ELTR) Have Stalled

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. So, when we ran our eye over Electra's (TLV:ELTR) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Electra:

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

0.11 = ₪354m ÷ (₪6.6b - ₪3.3b) (Based on the trailing twelve months to December 2020).

Therefore, Electra has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 9.8% generated by the Construction industry.

See our latest analysis for Electra

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 Electra's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

While the returns on capital are good, they haven't moved much. The company has consistently earned 11% for the last five years, and the capital employed within the business has risen 88% in that time. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

On a separate but related note, it's important to know that Electra has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

The main thing to remember is that Electra has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 301% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Electra does have some risks though, and we've spotted 2 warning signs for Electra that you might be interested in.

While Electra isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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