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

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Azorim-Investment Development & Construction (TLV:AZRM), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Azorim-Investment Development & Construction is:

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

0.049 = ₪198m ÷ (₪6.5b - ₪2.4b) (Based on the trailing twelve months to September 2022).

So, Azorim-Investment Development & Construction has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 6.4%.

See 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.

What Can We Tell From Azorim-Investment Development & Construction's ROCE Trend?

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 4.9% from 8.5% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Azorim-Investment Development & Construction have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 187% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Azorim-Investment Development & Construction (of which 1 is concerning!) that you should know about.

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.