Knafaim Holdings' (TLV:KNFM) Returns On Capital Are Heading Higher

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Knafaim Holdings' (TLV:KNFM) returns on capital, so let's have a look.

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. The formula for this calculation on Knafaim Holdings is:

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

0.14 = US$23m ÷ (US$217m - US$48m) (Based on the trailing twelve months to June 2023).

Thus, Knafaim Holdings has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Airlines industry average of 8.5% it's much better.

Check out our latest analysis for Knafaim Holdings

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Knafaim Holdings' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Knafaim Holdings Tell Us?

Like most people, we're pleased that Knafaim Holdings is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 14% which is no doubt a relief for some early shareholders. In regards to capital employed, Knafaim Holdings is using 88% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. Knafaim Holdings could be selling under-performing assets since the ROCE is improving.

One more thing to note, Knafaim Holdings has decreased current liabilities to 22% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

In a nutshell, we're pleased to see that Knafaim Holdings has been able to generate higher returns from less capital. Given the stock has declined 14% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 4 warning signs for Knafaim Holdings (1 is potentially serious) you should be aware of.

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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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.