Returns On Capital Are Showing Encouraging Signs At Knafaim Holdings (TLV:KNFM)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Knafaim Holdings' (TLV:KNFM) returns on capital, so let's have a look.

Understanding 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)

0.10 = US$16m ÷ (US$206m - US$48m) (Based on the trailing twelve months to September 2023).

Therefore, Knafaim Holdings has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.3% generated by the Airlines industry.

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 covering Knafaim Holdings' past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Knafaim Holdings is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 10% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 90% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. Knafaim Holdings could be selling under-performing assets since the ROCE is improving.

On a related note, the company's ratio of current liabilities to total assets has decreased to 23%, which basically reduces it's funding from the likes of short-term creditors or suppliers. 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.

What We Can Learn From Knafaim Holdings' ROCE

In summary, it's great to see that Knafaim Holdings has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 17% 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.

Knafaim Holdings does have some risks, we noticed 4 warning signs (and 1 which is concerning) we think you should know about.

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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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.