The Returns On Capital At O.Y. Nofar Energy (TLV:NOFR) Don't Inspire Confidence

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after investigating O.Y. Nofar Energy (TLV:NOFR), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on O.Y. Nofar Energy is:

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

0.0053 = ₪11m ÷ (₪2.2b - ₪130m) (Based on the trailing twelve months to December 2021).

Therefore, O.Y. Nofar Energy has an ROCE of 0.5%. Even though it's in line with the industry average of 0.5%, it's still a low return by itself.

See our latest analysis for O.Y. Nofar Energy

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 want to delve into the historical earnings, revenue and cash flow of O.Y. Nofar Energy, check out these free graphs here.

How Are Returns Trending?

On the surface, the trend of ROCE at O.Y. Nofar Energy doesn't inspire confidence. Over the last three years, returns on capital have decreased to 0.5% from 16% three years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, O.Y. Nofar Energy has decreased its current liabilities to 6.0% of total assets. Considering it used to be 61%, that's a huge drop in that ratio and it would explain the decline 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On 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 13% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about O.Y. Nofar Energy, we've spotted 2 warning signs, and 1 of them is significant.

While O.Y. Nofar Energy 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. 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.