Returns On Capital Signal Tricky Times Ahead For Shapir Engineering and Industry (TLV:SPEN)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Shapir Engineering and Industry is:

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

0.046 = ₪510m ÷ (₪14b - ₪3.2b) (Based on the trailing twelve months to June 2023).

Therefore, Shapir Engineering and Industry has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.4%.

Check out 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 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

In terms of Shapir Engineering and Industry's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 9.1%, but since then they've fallen to 4.6%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Shapir Engineering and Industry is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 98% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Shapir Engineering and Industry does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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.