Elma Electronic's (VTX:ELMN) Returns On Capital Are Heading Higher

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Elma Electronic (VTX:ELMN) looks quite promising in regards to its trends of return on capital.

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 Elma Electronic:

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

0.11 = CHF6.8m ÷ (CHF92m - CHF27m) (Based on the trailing twelve months to December 2020).

Therefore, Elma Electronic has an ROCE of 11%. In isolation, that's a pretty standard return but against the Electronic industry average of 15%, it's not as good.

See our latest analysis for Elma Electronic

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

What Does the ROCE Trend For Elma Electronic Tell Us?

Elma Electronic is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The amount of capital employed has increased too, by 29%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

What We Can Learn From Elma Electronic's ROCE

In summary, it's great to see that Elma Electronic can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And with a respectable 48% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a separate note, we've found 1 warning sign for Elma Electronic you'll probably want to know about.

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.

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This article by Simply Wall St is general in nature. 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.
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