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. Although, when we looked at Equital (TLV:EQTL), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
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 Equital is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.095 = ₪1.7b ÷ (₪21b - ₪2.9b) (Based on the trailing twelve months to December 2020).
So, Equital has an ROCE of 9.5%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 13%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Equital's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Equital, check out these free graphs here.
What Does the ROCE Trend For Equital Tell Us?
Over the past five years, Equital's ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Equital in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
The Bottom Line
We can conclude that in regards to Equital's returns on capital employed and the trends, there isn't much change to report on. And with the stock having returned a mere 37% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Equital (of which 1 can't be ignored!) that you should know about.
While Equital 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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