There Are Reasons To Feel Uneasy About ELECTRA POWER (2019)'s (TLV:ELCP) 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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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 ELECTRA POWER (2019) (TLV:ELCP) 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for ELECTRA POWER (2019):

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

0.02 = ₪30m ÷ (₪1.8b - ₪325m) (Based on the trailing twelve months to March 2023).

Thus, ELECTRA POWER (2019) has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 15%.

See our latest analysis for ELECTRA POWER (2019)

Historical performance is a great place to start when researching a stock so above you can see the gauge for ELECTRA POWER (2019)'s ROCE against it's prior returns. If you're interested in investigating ELECTRA POWER (2019)'s past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of ELECTRA POWER (2019)'s historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 2.0% from 11% four years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From ELECTRA POWER (2019)'s ROCE

Bringing it all together, while we're somewhat encouraged by ELECTRA POWER (2019)'s reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 62% over the last three years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for ELECTRA POWER (2019) (of which 2 are potentially serious!) that you should know about.

While ELECTRA POWER (2019) 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.