Fattal Holdings (1998) (TLV:FTAL) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Fattal Holdings (1998) (TLV:FTAL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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 Fattal Holdings (1998) is:

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

0.043 = ₪970m ÷ (₪25b - ₪2.8b) (Based on the trailing twelve months to June 2023).

Thus, Fattal Holdings (1998) has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.9%.

View our latest analysis for Fattal Holdings (1998)

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fattal Holdings (1998)'s ROCE against it's prior returns. If you're interested in investigating Fattal Holdings (1998)'s past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Fattal Holdings (1998)'s ROCE Trend?

When we looked at the ROCE trend at Fattal Holdings (1998), we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.3% from 5.7% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From Fattal Holdings (1998)'s ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Fattal Holdings (1998) is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 12% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One more thing: We've identified 2 warning signs with Fattal Holdings (1998) (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

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.

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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.