Will the Promising Trends At Automatic Bank Services (TLV:SHVA) Continue?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Automatic Bank Services' (TLV:SHVA) returns on capital, so let's have a look.

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. The formula for this calculation on Automatic Bank Services is:

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

0.16 = ₪31m ÷ (₪207m - ₪16m) (Based on the trailing twelve months to September 2020).

Therefore, Automatic Bank Services has an ROCE of 16%. By itself that's a normal return on capital and it's in line with the industry's average returns of 16%.

Check out 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'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 Can We Tell From Automatic Bank Services' ROCE Trend?

We're pretty happy with how the ROCE has been trending at Automatic Bank Services. The data shows that returns on capital have increased by 106% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 30% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

Our Take 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. Since the stock has returned a solid 92% to shareholders over the last year, it's fair to say investors are beginning to recognize these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 1 warning sign for Automatic Bank Services you'll probably want to know about.

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