Returns On Capital Signal Tricky Times Ahead For Isrotel (TLV:ISRO)

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Although, when we looked at Isrotel (TLV:ISRO), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Isrotel, this is the formula:

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

0.09 = ₪322m ÷ (₪4.3b - ₪711m) (Based on the trailing twelve months to September 2023).

So, Isrotel has an ROCE of 9.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.0%.

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'd like to look at how Isrotel has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Isrotel's ROCE Trend?

On the surface, the trend of ROCE at Isrotel doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.0% from 12% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Key Takeaway

To conclude, we've found that Isrotel is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 57% over the last five years, 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.

If you're still interested in Isrotel it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Isrotel may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.