Here's What's Concerning About Azorim-Investment Development & Construction's (TLV:AZRM) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Although, when we looked at Azorim-Investment Development & Construction (TLV:AZRM), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

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. To calculate this metric for Azorim-Investment Development & Construction, this is the formula:

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

0.06 = ₪161m ÷ (₪4.2b - ₪1.5b) (Based on the trailing twelve months to March 2021).

So, Azorim-Investment Development & Construction has an ROCE of 6.0%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 19%.

View our latest analysis for Azorim-Investment Development & Construction

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

So How Is Azorim-Investment Development & Construction's ROCE Trending?

On the surface, the trend of ROCE at Azorim-Investment Development & Construction doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 6.0%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Azorim-Investment Development & Construction has decreased 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.

Our Take On Azorim-Investment Development & Construction's ROCE

To conclude, we've found that Azorim-Investment Development & Construction is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 301% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Azorim-Investment Development & Construction does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is significant...

While Azorim-Investment Development & Construction 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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