O.Y. Nofar Energy (TLV:NOFR) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 O.Y. Nofar Energy (TLV:NOFR), it didn't seem to tick all of these boxes.

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. Analysts use this formula to calculate it for O.Y. Nofar Energy:

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

0.011 = ₪17m ÷ (₪1.6b - ₪133m) (Based on the trailing twelve months to September 2021).

So, O.Y. Nofar Energy has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 6.7%.

Check out our latest analysis for O.Y. Nofar Energy

Historical performance is a great place to start when researching a stock so above you can see the gauge for O.Y. Nofar Energy's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of O.Y. Nofar Energy, check out these free graphs here.

So How Is O.Y. Nofar Energy's ROCE Trending?

In terms of O.Y. Nofar Energy's historical ROCE movements, the trend isn't fantastic. Over the last two years, returns on capital have decreased to 1.1% from 19% two years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, O.Y. Nofar Energy has done well to pay down its current liabilities to 8.2% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

What We Can Learn From O.Y. Nofar Energy's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that O.Y. Nofar Energy is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 10% in the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

O.Y. Nofar Energy does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

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.