Should We Be Excited About The Trends Of Returns At Kerur Holdings (TLV:KRUR)?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Kerur Holdings (TLV:KRUR), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Kerur Holdings:

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

0.14 = ₪144m ÷ (₪1.2b - ₪220m) (Based on the trailing twelve months to September 2020).

Thus, Kerur Holdings has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Beverage industry average of 12%.

View our latest analysis for Kerur Holdings

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 Kerur Holdings, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Kerur Holdings, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 14%. However it looks like Kerur Holdings 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 may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Kerur Holdings' ROCE

Bringing it all together, while we're somewhat encouraged by Kerur Holdings' reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 70% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 2 warning signs with Kerur Holdings (at least 1 which is concerning) , and understanding these would certainly be useful.

While Kerur Holdings 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. 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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