The Returns On Capital At Shemen Industries (TLV:SMNIN) Don't Inspire Confidence

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Shemen Industries (TLV:SMNIN), we've spotted some signs that it could be struggling, so let's investigate.

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

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. To calculate this metric for Shemen Industries, this is the formula:

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

0.013 = ₪4.3m ÷ (₪440m - ₪110m) (Based on the trailing twelve months to September 2020).

Therefore, Shemen Industries has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Food industry average of 10%.

View our latest analysis for Shemen Industries

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 Shemen Industries' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

There is reason to be cautious about Shemen Industries, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 7.3% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Shemen Industries becoming one if things continue as they have.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 25%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.3%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line

In summary, it's unfortunate that Shemen Industries is generating lower returns from the same amount of capital. However the stock has delivered a 87% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Shemen Industries does have some risks, we noticed 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

While Shemen Industries 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.

If you decide to trade Shemen Industries, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.