Plasson Industries (TLV:PLSN) Has Some Way To Go To Become A Multi-Bagger

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at Plasson Industries (TLV:PLSN), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Plasson Industries:

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

0.087 = ₪112m ÷ (₪1.9b - ₪593m) (Based on the trailing twelve months to September 2020).

Thus, Plasson Industries has an ROCE of 8.7%. On its own, that's a low figure but it's around the 7.7% average generated by the Machinery industry.

See our latest analysis for Plasson Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Plasson Industries' ROCE against it's prior returns. If you'd like to look at how Plasson Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Plasson Industries' ROCE Trend?

In terms of Plasson Industries' historical ROCE trend, it doesn't exactly demand attention. The company has employed 32% more capital in the last five years, and the returns on that capital have remained stable at 8.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

As we've seen above, Plasson Industries' returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 84% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Plasson Industries does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

While Plasson Industries may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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