Hod Assaf Industries' (TLV:HOD) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. With that in mind, we've noticed some promising trends at Hod Assaf Industries (TLV:HOD) so let's look a bit deeper.

What is 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. To calculate this metric for Hod Assaf Industries, this is the formula:

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

0.058 = ₪31m ÷ (₪968m - ₪422m) (Based on the trailing twelve months to December 2020).

Therefore, Hod Assaf Industries has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.7%.

View our latest analysis for Hod Assaf Industries

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

What Does the ROCE Trend For Hod Assaf Industries Tell Us?

We're delighted to see that Hod Assaf Industries is reaping rewards from its investments and has now broken into profitability. The company now earns 5.8% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Hod Assaf Industries has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 44% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Hod Assaf Industries' ROCE

To sum it up, Hod Assaf Industries is collecting higher returns from the same amount of capital, and that's impressive. And a remarkable 139% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing, we've spotted 2 warning signs facing Hod Assaf Industries that you might find interesting.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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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