Returns On Capital Signal Tricky Times Ahead For Av-Gad Holdings (TLV:AVGD)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Av-Gad Holdings (TLV:AVGD) and its ROCE trend, we weren't exactly thrilled.

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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 Av-Gad Holdings, this is the formula:

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

0.00097 = ₪157k ÷ (₪465m - ₪303m) (Based on the trailing twelve months to March 2025).

Therefore, Av-Gad Holdings has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 9.0%.

Check out our latest analysis for Av-Gad Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Av-Gad Holdings' ROCE against it's prior returns. If you'd like to look at how Av-Gad Holdings has performed in the past in other metrics, you can view this free graph of Av-Gad Holdings' past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Av-Gad Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.1% from 11% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Av-Gad Holdings has a current liabilities to total assets ratio of 65%, which we'd consider pretty high. 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.

In Conclusion...

While returns have fallen for Av-Gad Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 107% return over the last three years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Like most companies, Av-Gad Holdings does come with some risks, and we've found 3 warning signs that you should be aware of.

While Av-Gad Holdings isn't earning the highest return, check out this free list of companies that are 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.