There Are Reasons To Feel Uneasy About Gold Bond Group's (TLV:GOLD) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Although, when we looked at Gold Bond Group (TLV:GOLD), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for Gold Bond Group:

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

0.011 = ₪8.3m ÷ (₪797m - ₪51m) (Based on the trailing twelve months to December 2020).

Thus, Gold Bond Group has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 5.4%.

See our latest analysis for Gold Bond Group

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

In terms of Gold Bond Group's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.1% from 12% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Gold Bond Group's ROCE

In summary, Gold Bond Group is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors may be recognizing these trends since the stock has only returned a total of 14% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Gold Bond Group does have some risks though, and we've spotted 1 warning sign for Gold Bond Group that you might be interested in.

While Gold Bond Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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