ETGA Group's (TLV:ETGA) Returns On Capital Are Heading Higher

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at ETGA Group (TLV:ETGA) and its trend of ROCE, we really liked what we saw.

What Is 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 ETGA Group, this is the formula:

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

0.15 = ₪38m ÷ (₪506m - ₪250m) (Based on the trailing twelve months to June 2023).

Therefore, ETGA Group has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.4% generated by the Logistics industry.

View our latest analysis for ETGA Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for ETGA Group's ROCE against it's prior returns. If you'd like to look at how ETGA Group 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 ETGA Group's ROCE Trend?

ETGA Group is showing promise given that its ROCE is trending up and to the right. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 30% over the last two years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 49% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Bottom Line On ETGA Group's ROCE

To sum it up, ETGA Group is collecting higher returns from the same amount of capital, and that's impressive. Astute investors may have an opportunity here because the stock has declined 58% in the last year. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.