Is Amanet Management & Systems (TLV:AMAN) Likely To Turn Things Around?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Amanet Management & Systems (TLV:AMAN) 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)?

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. Analysts use this formula to calculate it for Amanet Management & Systems:

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

0.035 = ₪4.5m ÷ (₪191m - ₪62m) (Based on the trailing twelve months to June 2020).

Therefore, 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 14%.

View our latest analysis for Amanet Management & Systems

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 Can We Tell From Amanet Management & Systems' ROCE Trend?

In terms of Amanet Management & Systems' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.9%, but since then they've fallen to 3.5%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Amanet Management & Systems' reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 46% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a separate note, we've found 2 warning signs for Amanet Management & Systems you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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