Has Carasso Motors (TLV:CRSO) Got What It Takes To Become A Multi-Bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 Carasso Motors (TLV:CRSO) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Carasso Motors:

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

0.055 = ₪196m ÷ (₪6.0b - ₪2.4b) (Based on the trailing twelve months to September 2020).

Thus, Carasso Motors has an ROCE of 5.5%. Even though it's in line with the industry average of 6.2%, it's still a low return by itself.

View our latest analysis for Carasso Motors

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Carasso Motors' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Carasso Motors Tell Us?

We weren't thrilled with the trend because Carasso Motors' ROCE has reduced by 61% over the last five years, while the business employed 82% more capital. That being said, Carasso Motors raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Carasso Motors might not have received a full period of earnings contribution from it.

Another thing to note, Carasso Motors has a high ratio of current liabilities to total assets of 41%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Carasso Motors' ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Carasso Motors have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 25% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 4 warning signs with Carasso Motors (at least 2 which shouldn't be ignored) , and understanding these would certainly be useful.

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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