Can CI Systems (Israel) (TLV:CISY) Continue To Grow Its Returns On Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, CI Systems (Israel) (TLV:CISY) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on CI Systems (Israel) is:

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

0.074 = US$1.4m ÷ (US$25m - US$6.2m) (Based on the trailing twelve months to September 2020).

Thus, CI Systems (Israel) has an ROCE of 7.4%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 9.2%.

View our latest analysis for CI Systems (Israel)

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 CI Systems (Israel), check out these free graphs here.

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 7.4%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 69%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From CI Systems (Israel)'s ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what CI Systems (Israel) has. Since the stock has returned a staggering 165% to shareholders over the last five years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if CI Systems (Israel) can keep these trends up, it could have a bright future ahead.

On a final note, we found 2 warning signs for CI Systems (Israel) (1 doesn't sit too well with us) you should be aware of.

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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