If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That’s why when we briefly looked at Top Ramdor Systems & Computers (1990)’s (TLV:TOPS) ROCE trend, we were pretty happy with what we saw.
Understanding Return On Capital Employed (ROCE)
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Top Ramdor Systems & Computers (1990), this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.16 = ₪16m ÷ (₪174m – ₪76m) (Based on the trailing twelve months to September 2021).
So, Top Ramdor Systems & Computers (1990) has an ROCE of 16%. In absolute terms, that’s a satisfactory return, but compared to the Software industry average of 7.7% it’s much better.
Check out our latest analysis for Top Ramdor Systems & Computers (1990)
TASE:TOPS Return on Capital Employed January 26th 2022
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 Top Ramdor Systems & Computers (1990), check out these free graphs here.
The Trend Of ROCE
While the returns on capital are good, they haven’t moved much. The company has consistently earned 16% for the last five years, and the capital employed within the business has risen 219% in that time. Since 16% is a moderate ROCE though, it’s good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
On a separate but related note, it’s important to know that Top Ramdor Systems & Computers (1990) has a current liabilities to total assets ratio of 44%, which we’d consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we’d like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Top Ramdor Systems & Computers (1990)’s ROCE
In the end, Top Ramdor Systems & Computers (1990) has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 681% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
Top Ramdor Systems & Computers (1990) does have some risks though, and we’ve spotted 3 warning signs for Top Ramdor Systems & Computers (1990) that you might be interested in.
While Top Ramdor Systems & Computers (1990) may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.