Strauss Group (TLV:STRS) Could Be Struggling To Allocate Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Strauss Group (TLV:STRS), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Strauss Group is:

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

0.058 = ₪313m ÷ (₪8.7b - ₪3.3b) (Based on the trailing twelve months to June 2024).

Therefore, Strauss Group has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Food industry average of 14%.

Check out our latest analysis for Strauss Group

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

What Does the ROCE Trend For Strauss Group Tell Us?

In terms of Strauss Group's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 12% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Strauss Group becoming one if things continue as they have.

What We Can Learn From Strauss Group's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 36% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Strauss Group we've found 4 warning signs (2 are a bit concerning!) that you should be aware of before investing here.

While Strauss Group 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.