Here's What's Concerning About Turpaz Industries' (TLV:TRPZ) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Turpaz Industries (TLV:TRPZ) 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. To calculate this metric for Turpaz Industries, this is the formula:

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

0.13 = US$18m ÷ (US$172m - US$35m) (Based on the trailing twelve months to June 2022).

Therefore, Turpaz Industries has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Chemicals industry average of 16%.

See our latest analysis for Turpaz Industries

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

What Can We Tell From Turpaz Industries' ROCE Trend?

When we looked at the ROCE trend at Turpaz Industries, we didn't gain much confidence. Over the last two years, returns on capital have decreased to 13% from 16% two years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Turpaz Industries has done well to pay down its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Turpaz Industries' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Turpaz Industries is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 39% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we've found 1 warning sign for Turpaz Industries that we think you should be aware of.

While Turpaz 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.