Amos Luzon Development and Energy Group's (TLV:LUZN) Returns On Capital Are Heading Higher

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Amos Luzon Development and Energy Group (TLV:LUZN) so let's look a bit deeper.

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 Amos Luzon Development and Energy Group, this is the formula:

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

0.14 = ₪123m ÷ (₪1.5b - ₪627m) (Based on the trailing twelve months to March 2022).

Thus, Amos Luzon Development and Energy Group has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Construction industry.

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're interested in investigating Amos Luzon Development and Energy Group's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Shareholders will be relieved that Amos Luzon Development and Energy Group has broken into profitability. The company now earns 14% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Amos Luzon Development and Energy Group has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a separate but related note, it's important to know that Amos Luzon Development and Energy Group has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Amos Luzon Development and Energy Group's ROCE

To sum it up, Amos Luzon Development and Energy Group is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 229% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Amos Luzon Development and Energy Group can keep these trends up, it could have a bright future ahead.

On a final note, we found 2 warning signs for Amos Luzon Development and Energy Group (1 makes us a bit uncomfortable) you should be aware of.

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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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.