What Can The Trends At Amos Luzon Development and Energy Group (TLV:LUZN) Tell Us About Their Returns?

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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

What is Return On Capital Employed (ROCE)?

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)

0.12 = ₪92m ÷ (₪1.6b - ₪834m) (Based on the trailing twelve months to September 2020).

Thus, Amos Luzon Development and Energy Group has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Construction industry average of 10%.

View our latest analysis for Amos Luzon Development and Energy Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Amos Luzon Development and Energy Group's ROCE against it's prior returns. 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.

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

The fact that Amos Luzon Development and Energy Group is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 12% on its capital. In addition to that, Amos Luzon Development and Energy Group is employing 41% 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.

On a related note, the company's ratio of current liabilities to total assets has decreased to 52%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

In Conclusion...

Long story short, we're delighted to see that Amos Luzon Development and Energy Group's reinvestment activities have paid off and the company is now profitable. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 65% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One final note, you should learn about the 5 warning signs we've spotted with Amos Luzon Development and Energy Group (including 1 which makes us a bit uncomfortable) .

While Amos Luzon Development and Energy Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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