Should You Be Impressed By Plasson Industries' (TLV:PLSN) Returns on Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Having said that, from a first glance at Plasson Industries (TLV:PLSN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on Plasson Industries is:

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 7.5% average generated by the Machinery industry.

View 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're interested in investigating Plasson Industries' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Plasson Industries' ROCE Trending?

In terms of Plasson Industries' historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 8.7% and the business has deployed 32% more capital into its operations. 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.

Our Take On Plasson Industries' ROCE

Long story short, while Plasson Industries has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 70% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you want to know some of the risks facing Plasson Industries we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Plasson Industries 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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This article by Simply Wall St is general in nature. 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.
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