Rami Levi Chain Stores Hashikma Marketing 2006 (TLV:RMLI) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Rami Levi Chain Stores Hashikma Marketing 2006 (TLV:RMLI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Rami Levi Chain Stores Hashikma Marketing 2006:

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

0.14 = ₪329m ÷ (₪3.8b - ₪1.5b) (Based on the trailing twelve months to June 2021).

Thus, Rami Levi Chain Stores Hashikma Marketing 2006 has an ROCE of 14%. That's a pretty standard return and it's in line with the industry average of 14%.

View our latest analysis for Rami Levi Chain Stores Hashikma Marketing 2006

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're interested in investigating Rami Levi Chain Stores Hashikma Marketing 2006's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Rami Levi Chain Stores Hashikma Marketing 2006 Tell Us?

In terms of Rami Levi Chain Stores Hashikma Marketing 2006's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 27% over the last five years. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Rami Levi Chain Stores Hashikma Marketing 2006 has decreased its current liabilities to 40% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Rami Levi Chain Stores Hashikma Marketing 2006's ROCE

In summary, Rami Levi Chain Stores Hashikma Marketing 2006 is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 104% 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.

Like most companies, Rami Levi Chain Stores Hashikma Marketing 2006 does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.