Shapir Engineering and Industry (TLV:SPEN) Is Reinvesting At Lower Rates Of Return

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.043 = ₪470m ÷ (₪14b - ₪3.3b) (Based on the trailing twelve months to December 2022).

Thus, Shapir Engineering and Industry has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.3%.

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

SWOT Analysis for Shapir Engineering and Industry

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

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 8.8%, but since then they've fallen to 4.3%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take 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 132% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Shapir Engineering and Industry (of which 1 can't be ignored!) that you should know about.

While Shapir Engineering and Industry isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.