Returns On Capital At Naphtha Israel Petroleum (TLV:NFTA) Paint A Concerning Picture

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Naphtha Israel Petroleum (TLV:NFTA), we weren't too upbeat about how things were going.

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 = ₪890m ÷ (₪5.6b - ₪687m) (Based on the trailing twelve months to September 2022).

So, Naphtha Israel Petroleum has an ROCE of 18%. 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 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 want to delve into the historical earnings, revenue and cash flow of Naphtha Israel Petroleum, check out these free graphs here.

So How Is Naphtha Israel Petroleum's ROCE Trending?

The trend of returns that Naphtha Israel Petroleum is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 18% we see today. In addition to that, Naphtha Israel Petroleum is now employing 23% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Key Takeaway

To see Naphtha Israel Petroleum reducing the capital employed in the business in tandem with diminishing returns, is concerning. Despite the concerning underlying trends, the stock has actually gained 32% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Naphtha Israel Petroleum, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Naphtha Israel Petroleum 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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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.