Automatic Bank Services (TLV:SHVA) Is Doing The Right Things To Multiply Its Share Price

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Automatic Bank Services (TLV:SHVA) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 Automatic Bank Services, this is the formula:

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

0.17 = ₪34m ÷ (₪219m - ₪20m) (Based on the trailing twelve months to December 2020).

Therefore, Automatic Bank Services has an ROCE of 17%. In absolute terms, that's a pretty normal return, and it's somewhat close to the IT industry average of 16%.

See our latest analysis for Automatic Bank Services

Historical performance is a great place to start when researching a stock so above you can see the gauge for Automatic Bank Services' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Automatic Bank Services, check out these free graphs here.

What Does the ROCE Trend For Automatic Bank Services Tell Us?

You'd find it hard not to be impressed with the ROCE trend at Automatic Bank Services. We found that the returns on capital employed over the last five years have risen by 109%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 25% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

What We Can Learn From Automatic Bank Services' ROCE

In a nutshell, we're pleased to see that Automatic Bank Services has been able to generate higher returns from less capital. Since the stock has returned a staggering 109% to shareholders over the last year, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Automatic Bank Services, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Automatic Bank Services 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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