There Are Reasons To Feel Uneasy About Carmit Candy Industries' (TLV:CRMT) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at Carmit Candy Industries (TLV:CRMT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Carmit Candy Industries:

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

0.037 = ₪5.5m ÷ (₪255m - ₪106m) (Based on the trailing twelve months to December 2022).

So, Carmit Candy Industries has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Food industry average of 7.7%.

See our latest analysis for Carmit Candy Industries

Historical performance is a great place to start when researching a stock so above you can see the gauge for Carmit Candy Industries' ROCE against it's prior returns. If you'd like to look at how Carmit Candy Industries has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Carmit Candy Industries' ROCE Trending?

In terms of Carmit Candy Industries' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.5%, but since then they've fallen to 3.7%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Carmit Candy Industries' current liabilities have increased over the last five years to 41% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

What We Can Learn From Carmit Candy Industries' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Carmit Candy Industries is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 22% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Carmit Candy Industries (of which 2 are potentially serious!) that you should know about.

While Carmit Candy Industries 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.