There Are Reasons To Feel Uneasy About Max Stock's (TLV:MAXO) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Max Stock (TLV:MAXO) and its ROCE trend, we weren't exactly thrilled.

Understanding 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. The formula for this calculation on Max Stock is:

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

0.14 = ₪117m ÷ (₪1.1b - ₪249m) (Based on the trailing twelve months to March 2022).

So, Max Stock has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Multiline Retail industry average of 5.0% it's much better.

Check out our latest analysis for Max Stock

Above you can see how the current ROCE for Max Stock compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Max Stock.

The Trend Of ROCE

When we looked at the ROCE trend at Max Stock, we didn't gain much confidence. To be more specific, ROCE has fallen from 38% over the last three years. However it looks like Max Stock might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Max Stock's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 51% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Max Stock has the makings of a multi-bagger.

One final note, you should learn about the 2 warning signs we've spotted with Max Stock (including 1 which can't be ignored) .

While Max Stock 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.

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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.