How Has Knafaim Holdings (TLV:KNFM) Allocated Its Capital?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Knafaim Holdings (TLV:KNFM), so let's see why.

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 Knafaim Holdings:

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

0.016 = US$4.1m ÷ (US$284m - US$37m) (Based on the trailing twelve months to September 2020).

So, Knafaim Holdings has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Airlines industry average of 6.4%.

View our latest analysis for Knafaim Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Knafaim Holdings' ROCE against it's prior returns. If you'd like to look at how Knafaim Holdings has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The trend of ROCE at Knafaim Holdings is showing some signs of weakness. To be more specific, today's ROCE was 12% five years ago but has since fallen to 1.6%. On top of that, the business is utilizing 78% less capital within its operations. 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.

On a side note, Knafaim Holdings has done well to pay down its current liabilities to 13% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Knafaim Holdings' ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Investors haven't taken kindly to these developments, since the stock has declined 62% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Knafaim Holdings, we've spotted 3 warning signs, and 1 of them is a bit concerning.

While Knafaim Holdings 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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