Investors Will Want Merchavia Holdings and Investments' (TLV:MRHL) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Merchavia Holdings and Investments (TLV:MRHL) and its trend of ROCE, we really liked what we saw.

What is 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. Analysts use this formula to calculate it for Merchavia Holdings and Investments:

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

0.13 = ₪5.2m ÷ (₪41m - ₪823k) (Based on the trailing twelve months to June 2021).

Therefore, Merchavia Holdings and Investments has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Medical Equipment industry average of 14%.

Check out our latest analysis for Merchavia Holdings and Investments

Historical performance is a great place to start when researching a stock so above you can see the gauge for Merchavia Holdings and Investments' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Merchavia Holdings and Investments, check out these free graphs here.

What Does the ROCE Trend For Merchavia Holdings and Investments Tell Us?

We're delighted to see that Merchavia Holdings and Investments is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 13% on its capital. Not only that, but the company is utilizing 94% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 2.0%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Merchavia Holdings and Investments has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Merchavia Holdings and Investments' ROCE

To the delight of most shareholders, Merchavia Holdings and Investments has now broken into profitability. Astute investors may have an opportunity here because the stock has declined 44% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Merchavia Holdings and Investments does have some risks, we noticed 5 warning signs (and 1 which is significant) we think you should know about.

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.

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.

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