Delek Automotive Systems (TLV:DLEA) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. However, after briefly looking over the numbers, we don't think Delek Automotive Systems (TLV:DLEA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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 Delek Automotive Systems, this is the formula:

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

0.14 = ₪974m ÷ (₪10b - ₪3.2b) (Based on the trailing twelve months to June 2023).

Therefore, Delek Automotive Systems has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 13%.

See our latest analysis for Delek Automotive Systems

Historical performance is a great place to start when researching a stock so above you can see the gauge for Delek Automotive Systems' ROCE against it's prior returns. If you're interested in investigating Delek Automotive Systems' 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 Delek Automotive Systems' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 33%, but since then they've fallen to 14%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Delek Automotive Systems has done well to pay down its current liabilities to 32% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Delek Automotive Systems' ROCE

While returns have fallen for Delek Automotive Systems in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 74% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you want to continue researching Delek Automotive Systems, you might be interested to know about the 3 warning signs that our analysis has discovered.

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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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.