What Can The Trends At Griñó Ecologic (BME:GRI) Tell Us About Their Returns?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. With that in mind, we've noticed some promising trends at Griñó Ecologic (BME:GRI) so let's look a bit deeper.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Griñó Ecologic:

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

0.054 = €2.1m ÷ (€63m - €24m) (Based on the trailing twelve months to December 2019).

Therefore, Griñó Ecologic has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 10%.

See our latest analysis for Griñó Ecologic

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

What Can We Tell From Griñó Ecologic's ROCE Trend?

Griñó Ecologic's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 105% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. 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.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 38% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Key Takeaway

To bring it all together, Griñó Ecologic has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 47% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing to note, we've identified 4 warning signs with Griñó Ecologic and understanding them should be part of your investment process.

While Griñó Ecologic 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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