Investors encountered a slowdown in return on capital at Isrotel (TLV: ISRO)
Finding a business that has the potential to grow significantly isn’t easy, but it is possible if we take a look at a few key financial metrics. First, we would like to identify a growth to recover on capital employed (ROCE) and at the same time, a based capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. However, after briefly reviewing the numbers, we don’t think Isrotel (TLV: ISRO) has the makings of a multi-bagger in the future, but let’s see why it may be.
Understanding Return on Capital Employed (ROCE)
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. Analysts use this formula to calculate it for Isrotel:
Return on capital employed = Profit before interest and taxes (EBIT) Ã· (Total assets – Current liabilities)
0.056 = 147m Ã· (âª 3.2b – âª 624m) (Based on the last twelve months up to June 2021).
So, Isrotel has a ROCE of 5.6%. On its own, that’s a low return, but compared to the 3.2% average generated by the hospitality industry, it’s much better.
See our latest analysis for Isrotel
Historical performance is a great place to start when looking for a stock. So you can see above the gauge of Isrotel’s ROCE compared to its past returns. If you want to investigate more about Isrotel’s past, check out this free graph of past income, income and cash flow.
What the ROCE trend can tell us
Returns on capital have not changed much for Isrotel in recent years. Over the past five years, ROCE has remained relatively stable at around 5.6% and the company has deployed 51% additional capital in its operations. This low ROCE does not inspire confidence at the moment, and with the increase in capital employed, it is evident that the company is not deploying the funds in high return investments.
The result of Isrotel’s ROCE
In short, Isrotel simply reinvested capital and generated the same low rate of return as before. Still, to long-term shareholders, the stock has offered them an incredible 271% return over the past five years, so the market appears to be optimistic about its future. However, unless these underlying trends turn more positive, our hopes would not be too high.
Isrotel does, however, carry certain risks, we have found 4 warning signs in our investment analysis, and 1 of them concerns …
While Isrotel does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. Check it out free list here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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