Some Investors May Be Worried About Shagrir Group Vehicle Services' (TLV:SHGR) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Shagrir Group Vehicle Services (TLV:SHGR), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. 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)

0.038 = ₪8.0m ÷ (₪393m - ₪181m) (Based on the trailing twelve months to September 2021).

Thus, Shagrir Group Vehicle Services has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 7.9%.

See our latest analysis for Shagrir Group Vehicle Services

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 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

We weren't thrilled with the trend because Shagrir Group Vehicle Services' ROCE has reduced by 56% over the last five years, while the business employed 170% more capital. Usually this isn't ideal, but given Shagrir Group Vehicle Services conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Shagrir Group Vehicle Services might not have received a full period of earnings contribution from it.

On a side note, Shagrir Group Vehicle Services' current liabilities are still rather high at 46% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Shagrir Group Vehicle Services' ROCE

In summary, Shagrir Group Vehicle Services is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 131% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

On a final note, we found 3 warning signs for Shagrir Group Vehicle Services (1 is a bit concerning) you should be aware of.

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.