Here's What's Concerning About Danel (Adir Yeoshua)'s (TLV:DANE) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So when we looked at Danel (Adir Yeoshua) (TLV:DANE), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Danel (Adir Yeoshua), this is the formula:

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

0.24 = ₪203m ÷ (₪1.3b - ₪415m) (Based on the trailing twelve months to September 2022).

Therefore, Danel (Adir Yeoshua) has an ROCE of 24%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

See our latest analysis for Danel (Adir Yeoshua)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Danel (Adir Yeoshua)'s ROCE against it's prior returns. If you're interested in investigating Danel (Adir Yeoshua)'s past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Danel (Adir Yeoshua)'s historical ROCE movements, the trend isn't fantastic. While it's comforting that the ROCE is high, five years ago it was 40%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

On a related note, Danel (Adir Yeoshua) has decreased its current liabilities to 33% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Danel (Adir Yeoshua)'s ROCE

To conclude, we've found that Danel (Adir Yeoshua) is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 77% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 2 warning signs for Danel (Adir Yeoshua) that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.