Returns On Capital At Azorim-Investment Development & Construction (TLV:AZRM) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Azorim-Investment Development & Construction (TLV:AZRM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. 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)

0.074 = ₪201m ÷ (₪4.8b - ₪2.1b) (Based on the trailing twelve months to June 2021).

Thus, Azorim-Investment Development & Construction has an ROCE of 7.4%. Even though it's in line with the industry average of 7.4%, it's still a low return by itself.

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 want to delve into the historical earnings, revenue and cash flow of Azorim-Investment Development & Construction, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Azorim-Investment Development & Construction, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.4% from 13% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Azorim-Investment Development & Construction has decreased its current liabilities to 43% of total assets. So we could link some of this to the decrease in ROCE. 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. Keep in mind 43% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On Azorim-Investment Development & Construction's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Azorim-Investment Development & Construction is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 303% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Azorim-Investment Development & Construction does have some risks though, and we've spotted 1 warning sign for Azorim-Investment Development & Construction that you might be interested in.

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. 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.
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