Stock Analysis

Shagrir Group Vehicle Services (TLV:SHGR) Will Be Hoping To Turn Its Returns On Capital Around

TASE:SHGR
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If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Shagrir Group Vehicle Services (TLV:SHGR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Shagrir Group Vehicle Services is:

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

0.01 = ₪3.3m ÷ (₪482m - ₪169m) (Based on the trailing twelve months to March 2023).

So, Shagrir Group Vehicle Services has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 5.9%.

Check out our latest analysis for Shagrir Group Vehicle Services

roce
TASE:SHGR Return on Capital Employed August 3rd 2023

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shagrir Group Vehicle Services' ROCE against it's prior returns. If you'd like to look at how Shagrir Group Vehicle Services 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 Shagrir Group Vehicle Services Tell Us?

On the surface, the trend of ROCE at Shagrir Group Vehicle Services doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Shagrir Group Vehicle Services has done well to pay down its current liabilities to 35% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Shagrir Group Vehicle Services' ROCE

While returns have fallen for Shagrir Group Vehicle Services in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 61% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you want to know some of the risks facing Shagrir Group Vehicle Services we've found 5 warning signs (2 are significant!) that you should be aware of before investing here.

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. 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.