Here's What To Make Of Plásticos Compuestos' (BME:KOM) Decelerating Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Plásticos Compuestos (BME:KOM), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Plásticos Compuestos, this is the formula:

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

0.055 = €1.3m ÷ (€35m - €11m) (Based on the trailing twelve months to December 2023).

Thus, Plásticos Compuestos has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 10%.

Check out our latest analysis for Plásticos Compuestos

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

So How Is Plásticos Compuestos' ROCE Trending?

There hasn't been much to report for Plásticos Compuestos' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So unless we see a substantial change at Plásticos Compuestos in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 33% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

Our Take On Plásticos Compuestos' ROCE

We can conclude that in regards to Plásticos Compuestos' returns on capital employed and the trends, there isn't much change to report on. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 70% in the last three years. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

On a separate note, we've found 2 warning signs for Plásticos Compuestos you'll probably want to know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com