Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. So when we looked at the ROCE trend of Ekotechnika (ETR:ETE) we really liked 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. Analysts use this formula to calculate it for Ekotechnika:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.48 = €22m ÷ (€140m - €95m) (Based on the trailing twelve months to September 2022).
Therefore, Ekotechnika has an ROCE of 48%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 16%.
Check out our latest analysis for Ekotechnika
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're interested in investigating Ekotechnika's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Ekotechnika Tell Us?
We like the trends that we're seeing from Ekotechnika. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 48%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 178%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 68%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Ekotechnika has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
The Key Takeaway
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Ekotechnika has. Since the total return from the stock has been almost flat over the last year, there might be an opportunity here if the valuation looks good. That being the case, research into the company's current valuation metrics and future prospects seems fitting.