Returns On Capital Are A Standout For Lachish Industries (TLV:LHIS)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So when we looked at the ROCE trend of Lachish Industries (TLV:LHIS) we really liked what we saw.

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. To calculate this metric for Lachish Industries, this is the formula:

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

0.21 = ₪9.2m ÷ (₪83m - ₪40m) (Based on the trailing twelve months to December 2020).

Therefore, Lachish Industries has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 7.7% earned by companies in a similar industry.

See our latest analysis for Lachish 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'd like to look at how Lachish Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Lachish Industries Tell Us?

Investors would be pleased with what's happening at Lachish Industries. Over the last five years, returns on capital employed have risen substantially to 21%. The amount of capital employed has increased too, by 35%. So we're very much inspired by what we're seeing at Lachish Industries thanks to its ability to profitably reinvest capital.

On a side note, Lachish Industries' current liabilities are still rather high at 48% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Lachish Industries' ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Lachish Industries has. Since the stock has returned a solid 99% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Lachish Industries, you might be interested to know about the 3 warning signs that our analysis has discovered.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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