Returns on Capital Paint A Bright Future For LIMES Schlosskliniken (ETR:LIK)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. And in light of that, the trends we're seeing at LIMES Schlosskliniken's (ETR:LIK) look very promising so lets take a look.

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 LIMES Schlosskliniken is:

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

0.26 = €6.0m ÷ (€27m - €3.2m) (Based on the trailing twelve months to December 2022).

Therefore, LIMES Schlosskliniken has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 5.2% earned by companies in a similar industry.

Check out our latest analysis for LIMES Schlosskliniken

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

The Trend Of ROCE

The fact that LIMES Schlosskliniken is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 26% which is a sight for sore eyes. Not only that, but the company is utilizing 234% more capital than before, but that's to be expected from a company 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.

One more thing to note, LIMES Schlosskliniken has decreased current liabilities to 12% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

Long story short, we're delighted to see that LIMES Schlosskliniken's reinvestment activities have paid off and the company is now profitable. Since the stock has returned a staggering 231% to shareholders over the last three years, it looks like investors are recognizing these changes. In light of that, we think it's worth looking further into this stock because if LIMES Schlosskliniken can keep these trends up, it could have a bright future ahead.

If you want to continue researching LIMES Schlosskliniken, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.