If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at elumeo (ETR:ELB) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on elumeo is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.021 = €333k ÷ (€26m - €10m) (Based on the trailing twelve months to June 2022).
Thus, elumeo has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 10%.
Check out the opportunities and risks within the DE Luxury industry.
In the above chart we have measured elumeo's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering elumeo here for free.
So How Is elumeo's ROCE Trending?
Like most people, we're pleased that elumeo is now generating some pretax earnings. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 2.1% on their capital employed. In regards to capital employed, elumeo is using 60% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
The Key Takeaway
In summary, it's great to see that elumeo has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has dived 74% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.
On a final note, we found 3 warning signs for elumeo (2 make us uncomfortable) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
About XTRA:ELB
elumeo
Through its subsidiaries, engages in the design, procurement, and distribution of gemstone jewelry.
Good value with reasonable growth potential.
