U.S. markets closed

  • S&P 500

    4,299.70
    +25.19 (+0.59%)
     

  • Dow 30

    33,666.34
    +116.07 (+0.35%)
     

  • Nasdaq

    13,201.28
    +108.43 (+0.83%)
     

  • Russell 2000

    1,794.31
    +15.41 (+0.87%)
     

  • Crude Oil

    91.83
    +0.12 (+0.13%)
     

  • Gold

    1,881.90
    +3.30 (+0.18%)
     

  • Silver

    22.88
    +0.14 (+0.61%)
     

  • EUR/USD

    1.0566
    -0.0001 (-0.01%)
     

  • 10-Yr Bond

    4.5970
    -0.0290 (-0.63%)
     

  • GBP/USD

    1.2206
    +0.0001 (+0.01%)
     

  • USD/JPY

    149.2580
    -0.0160 (-0.01%)
     

  • Bitcoin USD

    27,055.72
    +764.88 (+2.91%)
     

  • CMC Crypto 200

    581.30
    +16.50 (+2.92%)
     

  • FTSE 100

    7,601.85
    +8.63 (+0.11%)
     

  • Nikkei 225

    31,872.52
    -499.38 (-1.54%)
     

Eltek (NASDAQ:ELTK) Shareholders Will Want The ROCE Trajectory To Continue

Simply Wall St
·3 min read

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Eltek (NASDAQ:ELTK) so let's look a bit deeper.

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. The formula for this calculation on Eltek is:

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

0.087 = US$2.7m ÷ (US$41m - US$9.8m) (Based on the trailing twelve months to September 2022).

Therefore, Eltek has an ROCE of 8.7%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 13%.

View our latest analysis for Eltek

roce
roce

Historical performance is a great place to start when researching a stock so above you can see the gauge for Eltek's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Eltek, check out these free graphs here.

What Does the ROCE Trend For Eltek Tell Us?

We're delighted to see that Eltek is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 8.7% on its capital. In addition to that, Eltek is employing 458% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 24%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Eltek has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

Our Take On Eltek's ROCE

Long story short, we're delighted to see that Eltek's reinvestment activities have paid off and the company is now profitable. Considering the stock has delivered 18% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Eltek does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here