Capital Allocation Trends At M.Yochananof and Sons (1988) (TLV:YHNF) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Having said that, from a first glance at M.Yochananof and Sons (1988) (TLV:YHNF) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 M.Yochananof and Sons (1988):

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

0.11 = ₪292m ÷ (₪3.2b - ₪668m) (Based on the trailing twelve months to June 2021).

Therefore, M.Yochananof and Sons (1988) has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 14% generated by the Consumer Retailing industry.

See our latest analysis for M.Yochananof and Sons (1988)

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 M.Yochananof and Sons (1988)'s past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of M.Yochananof and Sons (1988)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 28% over the last four years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, M.Yochananof and Sons (1988) has decreased its current liabilities to 21% of total assets. Since the ratio used to be 72%, that's a significant reduction and it no doubt explains the drop 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 M.Yochananof and Sons (1988)'s ROCE

In summary, despite lower returns in the short term, we're encouraged to see that M.Yochananof and Sons (1988) is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 35% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know about the risks facing M.Yochananof and Sons (1988), we've discovered 1 warning sign that you should be aware of.

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.

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.