Returns On Capital At Carmel (TLV:CRML) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Carmel (TLV:CRML) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

We've discovered 2 warning signs about Carmel. View them for free.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Carmel, this is the formula:

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

0.015 = ₪8.7m ÷ (₪1.0b - ₪421m) (Based on the trailing twelve months to December 2024).

Thus, Carmel has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Beverage industry average of 12%.

View our latest analysis for Carmel

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'd like to look at how Carmel has performed in the past in other metrics, you can view this free graph of Carmel's past earnings, revenue and cash flow.

How Are Returns Trending?

Over the past four years, Carmel's ROCE has remained relatively flat while the business is using 29% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 1.5%, it's hard to get excited about these developments.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last four years. This is intriguing because if current liabilities hadn't increased to 42% of total assets, this reported ROCE would probably be less than1.5% because total capital employed would be higher.The 1.5% ROCE could be even lower if current liabilities weren't 42% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

What We Can Learn From Carmel's ROCE

In summary, Carmel isn't reinvesting funds back into the business and returns aren't growing. Although the market must be expecting these trends to improve because the stock has gained 17% over the last year. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you'd like to know more about Carmel, we've spotted 2 warning signs, and 1 of them doesn't sit too well with us.

While Carmel 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.