A Look Into Tadiran Group's (TLV:TDRN) Impressive Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. With that in mind, the ROCE of Tadiran Group (TLV:TDRN) looks attractive right now, so lets see what the trend of returns can tell us.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Tadiran Group:

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

0.27 = ₪224m ÷ (₪1.8b - ₪940m) (Based on the trailing twelve months to June 2022).

Thus, Tadiran Group has an ROCE of 27%. That's a fantastic return and not only that, it outpaces the average of 8.0% earned by companies in a similar industry.

Check out our latest analysis for Tadiran Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Tadiran Group's ROCE against it's prior returns. If you're interested in investigating Tadiran Group's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Tadiran Group's ROCE Trending?

It's hard not to be impressed by Tadiran Group's returns on capital. Over the past five years, ROCE has remained relatively flat at around 27% and the business has deployed 150% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

On a side note, Tadiran Group's current liabilities are still rather high at 53% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

In short, we'd argue Tadiran Group has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. And the stock has done incredibly well with a 572% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Like most companies, Tadiran Group does come with some risks, and we've found 2 warning signs that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.