Returns On Capital Are A Standout For Automatic Bank Services (TLV:SHVA)

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Automatic Bank Services' (TLV:SHVA) returns on capital, so let's have a look.

Understanding 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 Automatic Bank Services, this is the formula:

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

0.23 = ₪51m ÷ (₪239m - ₪20m) (Based on the trailing twelve months to June 2022).

Therefore, Automatic Bank Services has an ROCE of 23%. On its own that's a fantastic return on capital, though it's the same as the IT industry average of 23%.

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 want to delve into the historical earnings, revenue and cash flow of Automatic Bank Services, check out these free graphs here.

What Can We Tell From Automatic Bank Services' ROCE Trend?

You'd find it hard not to be impressed with the ROCE trend at Automatic Bank Services. The figures show that over the last five years, returns on capital have grown by 316%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 26% less than it was five years ago, which can be indicative of a business that's improving its efficiency. 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.

What We Can Learn From Automatic Bank Services' ROCE

From what we've seen above, Automatic Bank Services has managed to increase it's returns on capital all the while reducing it's capital base. And with the stock having performed exceptionally well over the last three years, these patterns are being accounted for by investors. 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.

If you'd like to know about the risks facing Automatic Bank Services, we've discovered 1 warning sign that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.