What Do The Returns At Shagrir Group Vehicle Services (TLV:SHGR) Mean Going Forward?

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. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Shagrir Group Vehicle Services (TLV:SHGR) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.07 = ₪9.0m ÷ (₪203m - ₪74m) (Based on the trailing twelve months to September 2020).

Therefore, Shagrir Group Vehicle Services has an ROCE of 7.0%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 8.2%.

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'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.

So How Is Shagrir Group Vehicle Services' ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 139% more capital is being employed now too. So we're very much inspired by what we're seeing at Shagrir Group Vehicle Services thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 37%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

To sum it up, Shagrir Group Vehicle Services has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And since the stock has fallen 37% over the last three years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to continue researching Shagrir Group Vehicle Services, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Shagrir Group Vehicle Services may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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