Shikun & Binui Ltd.’s (TLV:SKBN) Investment Returns Are Lagging Its Industry

Today we’ll look at Shikun & Binui Ltd. (TLV:SKBN) and reflect on its potential as an investment. Specifically, we’ll consider its Return On Capital Employed (ROCE), since that will give us an insight into how efficiently the business can generate profits from the capital it requires.

Firstly, we’ll go over how we calculate ROCE. Next, we’ll compare it to others in its industry. And finally, we’ll look at how its current liabilities are impacting its ROCE.

Understanding Return On Capital Employed (ROCE)

ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. In general, businesses with a higher ROCE are usually better quality. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Shikun & Binui:

0.053 = ₪552m ÷ (₪17b – ₪6.2b) (Based on the trailing twelve months to September 2019.)

Therefore, Shikun & Binui has an ROCE of 5.3%.

See our latest analysis for Shikun & Binui

Is Shikun & Binui’s ROCE Good?

When making comparisons between similar businesses, investors may find ROCE useful. Using our data, Shikun & Binui’s ROCE appears to be significantly below the 7.0% average in the Construction industry. This could be seen as a negative, as it suggests some competitors may be employing their capital more efficiently. Separate from how Shikun & Binui stacks up against its industry, its ROCE in absolute terms is mediocre; relative to the returns on government bonds. Readers may find more attractive investment prospects elsewhere.

Our data shows that Shikun & Binui currently has an ROCE of 5.3%, compared to its ROCE of 3.3% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Shikun & Binui’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

TASE:SKBN Past Revenue and Net Income, March 4th 2020
TASE:SKBN Past Revenue and Net Income, March 4th 2020

It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. You can check if Shikun & Binui has cyclical profits by looking at this free graph of past earnings, revenue and cash flow.

What Are Current Liabilities, And How Do They Affect Shikun & Binui’s ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months. The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise. To counteract this, we check if a company has high current liabilities, relative to its total assets.

Shikun & Binui has current liabilities of ₪6.2b and total assets of ₪17b. Therefore its current liabilities are equivalent to approximately 38% of its total assets. Shikun & Binui’s ROCE is improved somewhat by its moderate amount of current liabilities.

Our Take On Shikun & Binui’s ROCE

Unfortunately, its ROCE is still uninspiring, and there are potentially more attractive prospects out there. You might be able to find a better investment than Shikun & Binui. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

I will like Shikun & Binui better if I see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.