Returns On Capital At CompuLab (TLV:CLAB) Paint A Concerning Picture

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating CompuLab (TLV:CLAB), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on CompuLab is:

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

0.034 = ₪1.8m ÷ (₪92m - ₪41m) (Based on the trailing twelve months to December 2021).

Thus, CompuLab has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 9.0%.

See our latest analysis for CompuLab

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

What Can We Tell From CompuLab's ROCE Trend?

On the surface, the trend of ROCE at CompuLab doesn't inspire confidence. To be more specific, ROCE has fallen from 20% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a separate but related note, it's important to know that CompuLab has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for CompuLab have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 24% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

CompuLab does have some risks though, and we've spotted 3 warning signs for CompuLab that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.