Investors Could Be Concerned With Amanet Management & Systems' (TLV:AMAN) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Amanet Management & Systems (TLV:AMAN), we weren't too hopeful.

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

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 Amanet Management & Systems is:

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

0.035 = ₪4.1m ÷ (₪190m - ₪73m) (Based on the trailing twelve months to June 2022).

So, Amanet Management & Systems has an ROCE of 3.5%. In absolute terms, that's a low return and it also under-performs the Professional Services industry average of 13%.

Our analysis indicates that AMAN is potentially overvalued!

Historical performance is a great place to start when researching a stock so above you can see the gauge for Amanet Management & Systems' ROCE against it's prior returns. If you'd like to look at how Amanet Management & Systems has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Amanet Management & Systems Tell Us?

We are a bit worried about the trend of returns on capital at Amanet Management & Systems. About five years ago, returns on capital were 12%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Amanet Management & Systems to turn into a multi-bagger.

What We Can Learn From Amanet Management & Systems' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors must expect better things on the horizon though because the stock has risen 33% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing Amanet Management & Systems we've found 5 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

While Amanet Management & Systems 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.