The Returns On Capital At Isramco Negev 2 Limited Partnership (TLV:ISRA) Don't Inspire Confidence

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Isramco Negev 2 Limited Partnership (TLV:ISRA), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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)

0.19 = US$203m ÷ (US$1.3b - US$177m) (Based on the trailing twelve months to March 2023).

So, Isramco Negev 2 Limited Partnership has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 13% generated by the Oil and Gas industry.

View 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 want to delve into the historical earnings, revenue and cash flow of Isramco Negev 2 Limited Partnership, check out these free graphs here.

What Does the ROCE Trend For Isramco Negev 2 Limited Partnership Tell Us?

In terms of Isramco Negev 2 Limited Partnership's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 27%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Isramco Negev 2 Limited Partnership to turn into a multi-bagger.

The Bottom Line On Isramco Negev 2 Limited Partnership's ROCE

In summary, it's unfortunate that Isramco Negev 2 Limited Partnership is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 117%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 3 warning signs we've spotted with Isramco Negev 2 Limited Partnership (including 1 which is concerning) .

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.

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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.