Here's What's Concerning About Naphtha Israel Petroleum's (TLV:NFTA) Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Naphtha Israel Petroleum (TLV:NFTA), the trends above didn't look too great.

What Is 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. The formula for this calculation on Naphtha Israel Petroleum is:

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

0.18 = ₪892m ÷ (₪6.1b - ₪1.0b) (Based on the trailing twelve months to June 2024).

Therefore, Naphtha Israel Petroleum has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Oil and Gas industry average of 11% it's much better.

See our latest analysis for Naphtha Israel Petroleum

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Naphtha Israel Petroleum's past further, check out this free graph covering Naphtha Israel Petroleum's past earnings, revenue and cash flow.

So How Is Naphtha Israel Petroleum's ROCE Trending?

There is reason to be cautious about Naphtha Israel Petroleum, given the returns are trending downwards. About five years ago, returns on capital were 24%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Naphtha Israel Petroleum becoming one if things continue as they have.

What We Can Learn From Naphtha Israel Petroleum's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 105%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to continue researching Naphtha Israel Petroleum, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Naphtha Israel Petroleum 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.