Can Orad (TLV:ORAD) Turn Things Around?

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Orad (TLV:ORAD), we weren't too hopeful.

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

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

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

0.12 = ₪5.3m ÷ (₪136m - ₪93m) (Based on the trailing twelve months to September 2020).

So, Orad has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.

See our latest analysis for Orad

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

What Can We Tell From Orad's ROCE Trend?

The trend of returns that Orad is generating are raising some concerns. To be more specific, today's ROCE was 37% five years ago but has since fallen to 12%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 23% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 69%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 12%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Orad's ROCE

In summary, it's unfortunate that Orad is shrinking its capital base and also generating lower returns. Unsurprisingly then, the stock has dived 70% over the last five years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Orad we've found 3 warning signs (1 is concerning!) that you should be aware of before investing here.

While Orad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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