Shalag Industries (TLV:SALG) Is Reinvesting At Lower Rates Of Return

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Shalag Industries (TLV:SALG) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Shalag Industries is:

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

0.047 = ₪30m ÷ (₪817m - ₪185m) (Based on the trailing twelve months to March 2023).

Thus, Shalag Industries has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 9.8%.

View our latest analysis for Shalag Industries

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

What The Trend Of ROCE Can Tell Us

In terms of Shalag Industries' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 4.7% from 15% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Shalag Industries' ROCE

To conclude, we've found that Shalag Industries is reinvesting in the business, but returns have been falling. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think Shalag Industries has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with Shalag Industries (including 1 which shouldn't be ignored) .

While Shalag 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.

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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.