There Are Reasons To Feel Uneasy About Ashdod Refinery's (TLV:ARF) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Having said that, from a first glance at Ashdod Refinery (TLV:ARF) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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. To calculate this metric for Ashdod Refinery, this is the formula:

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

0.029 = US$21m ÷ (US$1.3b - US$606m) (Based on the trailing twelve months to September 2024).

So, Ashdod Refinery has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 8.7%.

Check out our latest analysis for Ashdod Refinery

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

What Can We Tell From Ashdod Refinery's ROCE Trend?

In terms of Ashdod Refinery's historical ROCE movements, the trend isn't fantastic. Around two years ago the returns on capital were 12%, but since then they've fallen to 2.9%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Ashdod Refinery has decreased its current liabilities to 46% of total assets. So we could link some of this to the decrease 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. Keep in mind 46% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line

We're a bit apprehensive about Ashdod Refinery because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 44% from where it was year ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Ashdod Refinery does have some risks though, and we've spotted 2 warning signs for Ashdod Refinery that you might be interested in.

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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.