The Returns On Capital At Shapir Engineering and Industry (TLV:SPEN) Don't Inspire Confidence

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Shapir Engineering and Industry (TLV:SPEN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. 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)

0.041 = ₪454m ÷ (₪14b - ₪3.3b) (Based on the trailing twelve months to March 2023).

Thus, Shapir Engineering and Industry has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.6%.

View 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 Can We Tell From Shapir Engineering and Industry's ROCE Trend?

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 9.3%, but since then they've fallen to 4.1%. 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.

The Key Takeaway

While returns have fallen for Shapir Engineering and Industry in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 151% 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: We've identified 3 warning signs with Shapir Engineering and Industry (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.