Be Wary Of Gan Shmuel Foods (TLV:GSFI) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Gan Shmuel Foods (TLV:GSFI) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Gan Shmuel Foods, this is the formula:

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

0.0032 = US$562k ÷ (US$213m - US$37m) (Based on the trailing twelve months to December 2020).

So, Gan Shmuel Foods has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Food industry average of 8.2%.

Check out our latest analysis for Gan Shmuel Foods

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 Gan Shmuel Foods, check out these free graphs here.

So How Is Gan Shmuel Foods' ROCE Trending?

On the surface, the trend of ROCE at Gan Shmuel Foods doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.3% from 12% five years ago. However it looks like Gan Shmuel Foods might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Gan Shmuel Foods' ROCE

To conclude, we've found that Gan Shmuel Foods is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you want to know some of the risks facing Gan Shmuel Foods we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. 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.
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