Returns On Capital At Shapir Engineering and Industry (TLV:SPEN) Paint A Concerning Picture

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 briefly looking over the numbers, we don't think Shapir Engineering and Industry (TLV:SPEN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Shapir Engineering and Industry:

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

0.076 = ₪536m ÷ (₪8.7b - ₪1.7b) (Based on the trailing twelve months to September 2021).

So, Shapir Engineering and Industry has an ROCE of 7.6%. In absolute terms, that's a low return but it's around the Construction industry average of 9.4%.

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 want to delve into the historical earnings, revenue and cash flow of Shapir Engineering and Industry, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Shapir Engineering and Industry, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 7.6%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Shapir Engineering and Industry's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Shapir Engineering and Industry. And the stock has done incredibly well with a 249% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

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

While Shapir Engineering and Industry 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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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.