Shufersal's (TLV:SAE) Returns On Capital Not Reflecting Well On The Business

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Shufersal (TLV:SAE), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Shufersal is:

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

0.048 = ₪491m ÷ (₪15b - ₪4.7b) (Based on the trailing twelve months to September 2022).

So, Shufersal has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 8.9%.

View our latest analysis for Shufersal

Historical performance is a great place to start when researching a stock so above you can see the gauge for Shufersal's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Shufersal, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Shufersal, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 4.8%. However it looks like Shufersal might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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 side note, Shufersal has done well to pay down its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

What We Can Learn From Shufersal's ROCE

To conclude, we've found that Shufersal is reinvesting in the business, but returns have been falling. Since the stock has declined 14% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Shufersal does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those is concerning...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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

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.