There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at Isrotel (TLV:ISRO), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Isrotel is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00094 = ₪2.4m ÷ (₪3.1b - ₪587m) (Based on the trailing twelve months to March 2021).
Therefore, Isrotel has an ROCE of 0.09%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 3.5%.
Check out our latest analysis for Isrotel
Historical performance is a great place to start when researching a stock so above you can see the gauge for Isrotel's ROCE against it's prior returns. If you're interested in investigating Isrotel's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
The trend of ROCE doesn't look fantastic because it's fallen from 5.9% five years ago, while the business's capital employed increased by 53%. That being said, Isrotel raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Isrotel probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.
Our Take On Isrotel's ROCE
In summary, we're somewhat concerned by Isrotel's diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 241% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
On a final note, we found 3 warning signs for Isrotel (2 are concerning) 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.
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About TASE:ISRO
Excellent balance sheet and fair value.
