Returns At CI Systems (Israel) (TLV:CISY) Appear To Be Weighed Down

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at CI Systems (Israel) (TLV:CISY) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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 CI Systems (Israel) is:

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

0.067 = US$1.3m ÷ (US$26m - US$7.3m) (Based on the trailing twelve months to December 2020).

Therefore, CI Systems (Israel) has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 9.6%.

View our latest analysis for CI Systems (Israel)

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

So How Is CI Systems (Israel)'s ROCE Trending?

In terms of CI Systems (Israel)'s historical ROCE trend, it doesn't exactly demand attention. The company has employed 64% more capital in the last five years, and the returns on that capital have remained stable at 6.7%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

Our Take On CI Systems (Israel)'s ROCE

In summary, CI Systems (Israel) has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 129% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we found 3 warning signs for CI Systems (Israel) (1 is a bit unpleasant) you should be aware of.

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This article by Simply Wall St is general in nature. 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.
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