Will the Promising Trends At E4U (SEP:EFORU) Continue?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at E4U (SEP:EFORU) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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 E4U, this is the formula:

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

0.19 = Kč59m ÷ (Kč356m - Kč46m) (Based on the trailing twelve months to June 2020).

So, E4U has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Renewable Energy industry.

View our latest analysis for E4U

Historical performance is a great place to start when researching a stock so above you can see the gauge for E4U's ROCE against it's prior returns. If you'd like to look at how E4U has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is E4U's ROCE Trending?

E4U has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 47% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

In Conclusion...

In summary, we're delighted to see that E4U has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 7.7% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing to note, we've identified 2 warning signs with E4U and understanding them should be part of your investment process.

While E4U 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. 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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