Delek Automotive Systems (TLV:DLEA) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Although, when we looked at Delek Automotive Systems (TLV:DLEA), it didn't seem to tick all of these boxes.

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

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. Analysts use this formula to calculate it for Delek Automotive Systems:

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

0.18 = ₪1.2b ÷ (₪10b - ₪3.6b) (Based on the trailing twelve months to March 2023).

So, Delek Automotive Systems has an ROCE of 18%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 15%.

View our latest analysis for Delek Automotive Systems

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 want to delve into the historical earnings, revenue and cash flow of Delek Automotive Systems, check out these free graphs here.

What Can We Tell From Delek Automotive Systems' ROCE Trend?

On the surface, the trend of ROCE at Delek Automotive Systems doesn't inspire confidence. Around five years ago the returns on capital were 40%, but since then they've fallen to 18%. 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, Delek Automotive Systems has done well to pay down its current liabilities to 35% of total assets. So we could link some of this to the decrease in ROCE. 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

In summary, despite lower returns in the short term, we're encouraged to see that Delek Automotive Systems is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 160% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Delek Automotive Systems does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

While Delek Automotive Systems isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.