Investors Shouldn't Overlook Automatic Bank Services' (TLV:SHVA) Impressive Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. And in light of that, the trends we're seeing at Automatic Bank Services' (TLV:SHVA) look very promising so lets take a look.

What is 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. Analysts use this formula to calculate it for Automatic Bank Services:

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

0.22 = ₪46m ÷ (₪227m - ₪19m) (Based on the trailing twelve months to September 2021).

So, Automatic Bank Services has an ROCE of 22%. In absolute terms that's a very respectable return and compared to the IT industry average of 18% it's pretty much on par.

View our latest analysis for Automatic Bank Services

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'd like to look at how Automatic Bank Services has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Automatic Bank Services has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 225% over the trailing five years. The company is now earning ₪0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 27% less capital than it was five years ago. Automatic Bank Services may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line On Automatic Bank Services' ROCE

In summary, it's great to see that Automatic Bank Services has been able to turn things around and earn higher returns on lower amounts of capital. And with a respectable 46% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Automatic Bank Services can keep these trends up, it could have a bright future ahead.

While Automatic Bank Services looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether SHVA is currently trading for a fair price.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.