There Are Reasons To Feel Uneasy About Carasso Motors' (TLV:CRSO) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Carasso Motors (TLV:CRSO) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Carasso Motors, this is the formula:

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

0.064 = ₪232m ÷ (₪6.0b - ₪2.4b) (Based on the trailing twelve months to December 2020).

Therefore, Carasso Motors has an ROCE of 6.4%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 9.8%.

Check out our latest analysis for Carasso Motors

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

How Are Returns Trending?

We weren't thrilled with the trend because Carasso Motors' ROCE has reduced by 59% over the last five years, while the business employed 86% more capital. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Carasso Motors' earnings and if they change as a result from the capital raise. Also, we found that by looking at the company's latest EBIT, the figure is within 10% of the previous year's EBIT so you can basically assign the ROCE drop primarily to that capital raise.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Carasso Motors' reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 26% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

Carasso Motors does have some risks, we noticed 4 warning signs (and 2 which are a bit concerning) we think you should know about.

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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