Be Wary Of Shapir Engineering and Industry (TLV:SPEN) And Its Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Shapir Engineering and Industry (TLV:SPEN) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Shapir Engineering and Industry, this is the formula:

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

0.051 = ₪524m ÷ (₪13b - ₪3.1b) (Based on the trailing twelve months to September 2022).

Thus, Shapir Engineering and Industry has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.8%.

See our latest analysis for Shapir Engineering and Industry

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 Shapir Engineering and Industry's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Shapir Engineering and Industry's ROCE Trending?

On the surface, the trend of ROCE at Shapir Engineering and Industry doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.1% from 9.2% five years ago. However it looks like Shapir Engineering and Industry might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Shapir Engineering and Industry's ROCE

In summary, Shapir Engineering and Industry is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 102% gain to shareholders who have held 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.

One more thing: We've identified 2 warning signs with Shapir Engineering and Industry (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

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.