Is This A Sign of Things To Come At Tedea Technological Development and Automation (TLV:TEDE)?

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount 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 we looked into Tedea Technological Development and Automation (TLV:TEDE), the trends above didn't look too great.

Understanding 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. The formula for this calculation on Tedea Technological Development and Automation is:

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

0.014 = ₪952k ÷ (₪115m - ₪49m) (Based on the trailing twelve months to June 2020).

So, Tedea Technological Development and Automation has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Electronic industry average of 12%.

Check out our latest analysis for Tedea Technological Development and Automation

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

What The Trend Of ROCE Can Tell Us

In terms of Tedea Technological Development and Automation's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 1.4% we see today. On top of that, the business is utilizing 47% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 42%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Tedea Technological Development and Automation's ROCE

In summary, it's unfortunate that Tedea Technological Development and Automation is shrinking its capital base and also generating lower returns. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 78% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing Tedea Technological Development and Automation we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

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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