Has Shapir Engineering and Industry (TLV:SPEN) Got What It Takes To Become A Multi-Bagger?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Shapir Engineering and Industry (TLV:SPEN), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.083 = ₪480m ÷ (₪8.1b - ₪2.3b) (Based on the trailing twelve months to September 2020).

Therefore, Shapir Engineering and Industry has an ROCE of 8.3%. On its own, that's a low figure but it's around the 10% average generated by the Construction industry.

Check out our latest analysis for Shapir Engineering and Industry

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shapir Engineering and Industry's ROCE against it's prior returns. 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.

What Does the ROCE Trend For Shapir Engineering and Industry Tell Us?

In terms of Shapir Engineering and Industry's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 8.3% for the last five years, and the capital employed within the business has risen 123% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

The Key Takeaway

Long story short, while Shapir Engineering and Industry has been reinvesting its capital, the returns that it's generating haven't increased. Yet to long term shareholders the stock has gifted them an incredible 322% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One more thing to note, we've identified 1 warning sign with Shapir Engineering and Industry and understanding this should be part of your investment process.

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. 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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