Shagrir Group Vehicle Services' (TLV:SHGR) Returns On Capital Not Reflecting Well On The Business

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Shagrir Group Vehicle Services (TLV:SHGR) and its ROCE trend, we weren't exactly thrilled.

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

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. To calculate this metric for Shagrir Group Vehicle Services, this is the formula:

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

0.012 = ₪3.8m ÷ (₪475m - ₪174m) (Based on the trailing twelve months to June 2023).

Thus, Shagrir Group Vehicle Services has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 2.5%.

View our latest analysis for Shagrir Group Vehicle Services

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 want to delve into the historical earnings, revenue and cash flow of Shagrir Group Vehicle Services, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Shagrir Group Vehicle Services, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.2% from 16% five years ago. However it looks like Shagrir Group Vehicle Services might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

In Conclusion...

To conclude, we've found that Shagrir Group Vehicle Services is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 61% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Shagrir Group Vehicle Services has the makings of a multi-bagger.

One final note, you should learn about the 4 warning signs we've spotted with Shagrir Group Vehicle Services (including 2 which don't sit too well with us) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.