Can Cham Foods (Israel) (TLV:CHAM) Continue To Grow Its Returns On Capital?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Cham Foods (Israel) (TLV:CHAM) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Cham Foods (Israel) is:

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

0.082 = US$1.5m ÷ (US$30m - US$12m) (Based on the trailing twelve months to June 2020).

Thus, Cham Foods (Israel) has an ROCE of 8.2%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.

Check out our latest analysis for Cham Foods (Israel)

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 Cham Foods (Israel)'s past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Cham Foods (Israel)'s ROCE Trending?

It's great to see that Cham Foods (Israel) has started to generate some pre-tax earnings from prior investments. The company was generating losses five years ago, but now it's turned around, earning 8.2% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 57% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Cham Foods (Israel) could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 39% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

In summary, it's great to see that Cham Foods (Israel) has been able to turn things around and earn higher returns on lower amounts of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 1.5% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to continue researching Cham Foods (Israel), you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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