Amos Luzon Development and Energy Group (TLV:LUZN) Is Doing The Right Things To Multiply Its Share Price

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Amos Luzon Development and Energy Group (TLV:LUZN) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Amos Luzon Development and Energy Group, this is the formula:

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

0.091 = ₪84m ÷ (₪1.6b - ₪656m) (Based on the trailing twelve months to March 2021).

So, Amos Luzon Development and Energy Group has an ROCE of 9.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.3%.

See our latest analysis for Amos Luzon Development and Energy Group

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 Amos Luzon Development and Energy Group, check out these free graphs here.

What Does the ROCE Trend For Amos Luzon Development and Energy Group Tell Us?

We're delighted to see that Amos Luzon Development and Energy Group is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 9.1% which is a sight for sore eyes. In addition to that, Amos Luzon Development and Energy Group is employing 69% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 42%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Amos Luzon Development and Energy Group has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

What We Can Learn From Amos Luzon Development and Energy Group's ROCE

To the delight of most shareholders, Amos Luzon Development and Energy Group has now broken into profitability. Since the stock has returned a staggering 402% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 4 warning signs with Amos Luzon Development and Energy Group and understanding them should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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