M.Yochananof and Sons (1988)'s (TLV:YHNF) Returns On Capital Not Reflecting Well On The Business

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think M.Yochananof and Sons (1988) (TLV:YHNF) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 M.Yochananof and Sons (1988) is:

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

0.13 = ₪259m ÷ (₪2.7b - ₪633m) (Based on the trailing twelve months to December 2020).

Thus, M.Yochananof and Sons (1988) has an ROCE of 13%. By itself that's a normal return on capital and it's in line with the industry's average returns of 13%.

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 want to delve into the historical earnings, revenue and cash flow of M.Yochananof and Sons (1988), check out these free graphs here.

So How Is M.Yochananof and Sons (1988)'s ROCE Trending?

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 29% over the last four years. However it looks like M.Yochananof and Sons (1988) 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 related note, M.Yochananof and Sons (1988) has decreased its current liabilities to 24% of total assets. Since the ratio used to be 81%, that's a significant reduction and it no doubt explains the drop in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

To conclude, we've found that M.Yochananof and Sons (1988) is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 34% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

M.Yochananof and Sons (1988) could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

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.

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