Returns On Capital At Israel Shipyards Industries (TLV:ISHI) Paint A Concerning Picture

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. However, after briefly looking over the numbers, we don't think Israel Shipyards Industries (TLV:ISHI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 Israel Shipyards Industries is:

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

0.036 = ₪43m ÷ (₪1.8b - ₪565m) (Based on the trailing twelve months to September 2024).

Therefore, Israel Shipyards Industries has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Aerospace & Defense industry average of 12%.

Check out our latest analysis for Israel Shipyards Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Israel Shipyards Industries' ROCE against it's prior returns. If you'd like to look at how Israel Shipyards Industries has performed in the past in other metrics, you can view this free graph of Israel Shipyards Industries' past earnings, revenue and cash flow.

What Does the ROCE Trend For Israel Shipyards Industries Tell Us?

When we looked at the ROCE trend at Israel Shipyards Industries, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Israel Shipyards Industries has decreased its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Israel Shipyards Industries' ROCE

In summary, we're somewhat concerned by Israel Shipyards Industries' diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 39% return over the last three years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

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

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. 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.