Be Wary Of Abra Information Technologies (TLV:ABRA) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Although, when we looked at Abra Information Technologies (TLV:ABRA), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Abra Information Technologies, this is the formula:

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

0.014 = ₪3.6m ÷ (₪344m - ₪94m) (Based on the trailing twelve months to December 2021).

So, Abra Information Technologies has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Software industry average of 7.7%.

Check out our latest analysis for Abra Information Technologies

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

The Trend Of ROCE

On the surface, the trend of ROCE at Abra Information Technologies doesn't inspire confidence. To be more specific, ROCE has fallen from 3.1% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Abra Information Technologies' current liabilities have increased over the last five years to 27% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 1.4%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On Abra Information Technologies' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Abra Information Technologies is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 102% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Abra Information Technologies (of which 1 makes us a bit uncomfortable!) that you should know about.

While Abra Information Technologies isn't earning the highest return, check out this free list of companies that are 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.