Slowing Rates Of Return At Israel Shipyards Industries (TLV:ISHI) Leave Little Room For Excitement

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So, when we ran our eye over Israel Shipyards Industries' (TLV:ISHI) trend of ROCE, we liked what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Israel Shipyards Industries, this is the formula:

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

0.17 = ₪186m ÷ (₪1.6b - ₪536m) (Based on the trailing twelve months to September 2022).

So, Israel Shipyards Industries has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Aerospace & Defense industry.

Check out our latest analysis for Israel Shipyards Industries

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 want to delve into the historical earnings, revenue and cash flow of Israel Shipyards Industries, check out these free graphs here.

So How Is Israel Shipyards Industries' ROCE Trending?

While the returns on capital are good, they haven't moved much. Over the past three years, ROCE has remained relatively flat at around 17% and the business has deployed 99% more capital into its operations. Since 17% 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 side note, Israel Shipyards Industries has done well to reduce current liabilities to 33% of total assets over the last three years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Israel Shipyards Industries' ROCE

To sum it up, Israel Shipyards Industries has simply been reinvesting capital steadily, at those decent rates of return. And since the stock has risen strongly over the last year, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you'd like to know about the risks facing Israel Shipyards Industries, we've discovered 1 warning sign that you should be aware of.

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.