If we are to find a title that could multiply over the long term, what are the underlying trends that we need to look for? A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth quantity capital employed. Ultimately, this demonstrates that this is a company that is reinvesting its profits at increasing rates of return. However, after investigation Azorim-Investissement Development & Construction (TLV: AZRM), we don’t think the current trends fit the mold of a multi-bagger.
What is Return on Employee Capital (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. The formula for this calculation on Azorim-Investment Development & Construction is:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.072 = ₪ 228m ÷ (₪ 5.2b – ₪ 2.1b) (Based on the last twelve months up to September 2021).
Thereby, Azorim-Investment Development & Construction posted a ROCE of 7.2%. On its own, this is a low return on capital, but it is in line with industry average returns of 7.2%.
See our latest analysis for Azorim-Investment Development & Construction
Historical performance is a great place to start when looking for a stock, so above you can see the gauge of Azorim-Investment Development & Construction’s ROCE against past returns. If you want to examine the performance of Azorim-Investment Development & Construction in the past in other metrics, you can check this free graph of past income, income and cash flow.
What the ROCE trend can tell us
On the surface, the ROCE trend at Azorim-Investment Development & Construction does not inspire confidence. About five years ago, returns on capital were 13%, but since then they have fallen to 7.2%. Although, as both income and the amount of assets used in the business have increased, this could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. And if the capital increase generates additional returns, the company, and therefore shareholders, will benefit in the long run.
On a related note, Azorim-Investment Development & Construction reduced its current liabilities to 40% of total assets. This could partly explain the drop in ROCE. In effect, this means that their suppliers or short-term creditors fund the business less, which reduces some elements of risk. Some would argue that this reduces the company’s efficiency in generating ROCE, as it now finances a greater portion of operations with its own money.
In summary, despite lower returns in the short term, we are encouraged to see Azorim-Investment Development & Construction reinvesting for growth and therefore have higher sales. And the stock has performed incredibly well with a return of 393% over the past five years, so long-term investors are no doubt delighted with the result. So if these growth trends continue, we would be optimistic about the future of the title.
If you would like to continue your research on Azorim-Investment Development & Construction, you might be interested in knowing the 2 warning signs that our analysis uncovered.
Although Azorim-Investment Development & Construction 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.
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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 any stock 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 any of the stocks mentioned.