Israel Shipyards Industries (TLV:ISHI) reinvests at lower rates of return

There are a few key trends to look out for if we want to identify the next multi-bagger. First, we’ll want to see proof to return to on capital employed (ROCE) which is increasing, and on the other hand, a base capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. However, after briefly looking at the numbers, we don’t think Israeli shipyard industries (TLV:ISHI) has the makings of a multi-bagger in the future, but let’s see why it might be.

What is 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. To calculate this metric for Israel Shipyards Industries, here is the formula:

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

0.14 = ₪132m ÷ (₪1.5b – ₪532m) (Based on the last twelve months to December 2021).

Thereby, Israel Shipyards Industries has a ROCE of 14%. In absolute terms, that’s a decent return, but compared to the aerospace and defense industry average of 6.0%, that’s much better.

Check out our latest analysis for Israel Shipyards Industries

TASE: ISHI Return on Capital Employed May 15, 2022

Historical performance is a great starting point when researching a stock. So above you can see Israel Shipyards Industries’ ROCE gauge compared to its past returns. If you want to dive deep into Israel Shipyards Industries earnings, revenue, and cash flow history, check out these free graphics here.

What does the ROCE trend tell us for Israeli shipyards?

On the surface, the ROCE trend at Israel Shipyards Industries does not inspire confidence. About three years ago, the return on capital was 20%, but since then it has fallen to 14%. However, given that capital employed and revenue have both increased, it appears that the company is currently continuing to grow, following short-term returns. If these investments prove successful, it can bode very well for long-term stock performance.

Elsewhere, Israel Shipyards Industries did well to repay its short-term debt at 36% of total assets. This could partly explain why ROCE fell. Additionally, it may reduce some aspects of risk to the business, as the business’s suppliers or short-term creditors now fund less of its operations. Since the company is essentially funding more of its operations with its own money, one could argue that this has made the company less efficient at generating a return on investment.

In conclusion…

Even though capital returns have fallen in the short term, we think it’s promising that both revenue and capital employed have increased for Israel Shipyards Industries. Moreover, the stock has climbed 23% in the last year, it would seem that investors are optimistic about the future. So while investors seem to be recognizing these promising trends, we would be looking further into this stock to make sure the other metrics justify the positive view.

If you want to know the risks facing Israel Shipyards Industries, we have discovered 1 warning sign which you should be aware of.

Although Israel Shipyards Industries does not currently generate the highest returns, we have compiled a list of companies that currently generate over 25% return on equity. look at this free list here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.