Some Investors May Be Worried About CI Systems (Israel)'s (TLV:CISY) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Although, when we looked at CI Systems (Israel) (TLV:CISY), it didn't seem to tick all of these boxes.

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. To calculate this metric for CI Systems (Israel), this is the formula:

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

0.027 = US$776k ÷ (US$39m - US$11m) (Based on the trailing twelve months to September 2024).

Thus, CI Systems (Israel) has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 7.2%.

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're interested in investigating CI Systems (Israel)'s past further, check out this free graph covering CI Systems (Israel)'s past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of CI Systems (Israel)'s historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 3.5% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

In summary, we're somewhat concerned by CI Systems (Israel)'s diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 790% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about CI Systems (Israel), we've spotted 2 warning signs, and 1 of them is concerning.

While CI Systems (Israel) 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.