Hamat Group (TLV:HAMAT) Will Be Hoping To Turn Its Returns On Capital Around

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Hamat Group (TLV:HAMAT), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Hamat Group:

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

0.20 = ₪100m ÷ (₪984m - ₪478m) (Based on the trailing twelve months to September 2021).

Therefore, Hamat Group has an ROCE of 20%. That's a pretty standard return and it's in line with the industry average of 20%.

View our latest analysis for Hamat Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hamat Group's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hamat Group, check out these free graphs here.

What Can We Tell From Hamat Group's ROCE Trend?

In terms of Hamat Group's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 33% over the last five years. 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, Hamat Group's current liabilities are still rather high at 49% 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 Hamat Group's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Hamat Group is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 77% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Hamat Group does have some risks though, and we've spotted 3 warning signs for Hamat Group that you might be interested in.

While Hamat Group 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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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.