Stock Analysis

Returns On Capital - An Important Metric For Endymed (TLV:ENDY)

TASE:ENDY
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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Endymed's (TLV:ENDY) returns on capital, so let's have a look.

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. To calculate this metric for Endymed, this is the formula:

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

0.13 = US$1.4m ÷ (US$13m - US$2.2m) (Based on the trailing twelve months to June 2020).

So, Endymed has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Medical Equipment industry.

View our latest analysis for Endymed

roce
TASE:ENDY Return on Capital Employed January 11th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Endymed's ROCE against it's prior returns. If you're interested in investigating Endymed's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Shareholders will be relieved that Endymed has broken into profitability. The company now earns 13% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Endymed has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line

To sum it up, Endymed is collecting higher returns from the same amount of capital, and that's impressive. However the stock is down a substantial 76% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

If you want to know some of the risks facing Endymed we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Endymed 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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