Stock Analysis

Isramco Negev 2 Limited Partnership (TLV:ISRA) Is Finding It Tricky To Allocate Its Capital

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TASE:ISRA
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What underlying fundamental trends can indicate that a company might be in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Isramco Negev 2 Limited Partnership (TLV:ISRA), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for Isramco Negev 2 Limited Partnership:

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

0.17 = US$196m ÷ (US$1.4b - US$201m) (Based on the trailing twelve months to September 2023).

Therefore, Isramco Negev 2 Limited Partnership has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Oil and Gas industry average of 14%.

Check out our latest analysis for Isramco Negev 2 Limited Partnership

roce
TASE:ISRA Return on Capital Employed December 28th 2023

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.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Isramco Negev 2 Limited Partnership. Unfortunately the returns on capital have diminished from the 25% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Isramco Negev 2 Limited Partnership to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 87% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Isramco Negev 2 Limited Partnership (of which 1 shouldn't be ignored!) that you should know about.

While Isramco Negev 2 Limited Partnership isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Isramco Negev 2 Limited Partnership is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.