Returns On Capital Signal Difficult Times Ahead For IMCO Industries (TLV:IMCO)

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into IMCO Industries (TLV:IMCO), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for IMCO Industries:

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

0.0031 = ₪334k ÷ (₪238m - ₪132m) (Based on the trailing twelve months to December 2022).

Therefore, IMCO Industries has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 13%.

View our latest analysis for IMCO Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for IMCO Industries' ROCE against it's prior returns. If you'd like to look at how IMCO Industries 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?

We are a bit worried about the trend of returns on capital at IMCO Industries. About five years ago, returns on capital were 3.1%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect IMCO Industries to turn into a multi-bagger.

On a side note, IMCO Industries' current liabilities have increased over the last five years to 55% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.3%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On IMCO Industries' ROCE

In summary, it's unfortunate that IMCO Industries is generating lower returns from the same amount of capital. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

IMCO Industries does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those can't be ignored...

While IMCO Industries 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.