Elbit Systems' (TLV:ESLT) Returns Have Hit A Wall

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. 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 Elbit Systems (TLV:ESLT) 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 Elbit Systems is:

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

0.076 = US$391m ÷ (US$10b - US$5.1b) (Based on the trailing twelve months to March 2024).

Thus, Elbit Systems has an ROCE of 7.6%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 14%.

Check out our latest analysis for Elbit Systems

Above you can see how the current ROCE for Elbit Systems compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Elbit Systems .

What Can We Tell From Elbit Systems' ROCE Trend?

There are better returns on capital out there than what we're seeing at Elbit Systems. The company has consistently earned 7.6% for the last five years, and the capital employed within the business has risen 46% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a separate but related note, it's important to know that Elbit Systems has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. 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.

The Bottom Line On Elbit Systems' ROCE

Long story short, while Elbit Systems has been reinvesting its capital, the returns that it's generating haven't increased. And with the stock having returned a mere 31% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you're still interested in Elbit Systems it's worth checking out our FREE intrinsic value approximation for ESLT to see if it's trading at an attractive price in other respects.

While Elbit Systems 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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com