Albaad Massuot Yitzhak (TLV:ALBA) Is Finding It Tricky To Allocate Its Capital

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Albaad Massuot Yitzhak (TLV:ALBA), so let's see why.

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 Albaad Massuot Yitzhak:

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

0.017 = ₪12m ÷ (₪1.6b - ₪911m) (Based on the trailing twelve months to December 2022).

Therefore, Albaad Massuot Yitzhak has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Household Products industry average of 7.7%.

View our latest analysis for Albaad Massuot Yitzhak

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

What Does the ROCE Trend For Albaad Massuot Yitzhak Tell Us?

In terms of Albaad Massuot Yitzhak's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 7.7% five years ago but has since fallen to 1.7%. In addition to that, Albaad Massuot Yitzhak is now employing 27% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Albaad Massuot Yitzhak's current liabilities have increased over the last five years to 57% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Albaad Massuot Yitzhak's ROCE

To see Albaad Massuot Yitzhak reducing the capital employed in the business in tandem with diminishing returns, is concerning. Unsurprisingly then, the stock has dived 79% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Albaad Massuot Yitzhak, we've spotted 5 warning signs, and 3 of them don't sit too well with us.

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.

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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.