Isramco Negev 2 Limited Partnership (TLV:ISRA.L) Has Some Way To Go To Become A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Isramco Negev 2 Limited Partnership (TLV:ISRA.L), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

What is 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. To calculate this metric for Isramco Negev 2 Limited Partnership, this is the formula:

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

0.20 = US$226m ÷ (US$1.3b - US$199m) (Based on the trailing twelve months to September 2021).

Thus, Isramco Negev 2 Limited Partnership has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 9.1% earned by companies in a similar industry.

Check out our latest analysis for Isramco Negev 2 Limited Partnership

Historical performance is a great place to start when researching a stock so above you can see the gauge for Isramco Negev 2 Limited Partnership's ROCE against it's prior returns. If you'd like to look at how Isramco Negev 2 Limited Partnership has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 23% in that same period. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. However, the business's operational efficiency is still impressive considering the ROCE is high in absolute terms.

What We Can Learn From Isramco Negev 2 Limited Partnership's ROCE

It's a shame to see that Isramco Negev 2 Limited Partnership is effectively shrinking in terms of its capital base. Unsurprisingly then, the total return to shareholders over the last five years has been flat. 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.

One more thing: We've identified 3 warning signs with Isramco Negev 2 Limited Partnership (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

Isramco Negev 2 Limited Partnership is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.