Returns On Capital Are Showing Encouraging Signs At Plásticos Compuestos (BME:KOM)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Plásticos Compuestos (BME:KOM) 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 Plásticos Compuestos:

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

0.052 = €1.4m ÷ (€38m - €12m) (Based on the trailing twelve months to December 2019).

So, Plásticos Compuestos has an ROCE of 5.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 10%.

See our latest analysis for Plásticos Compuestos

Above you can see how the current ROCE for Plásticos Compuestos compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Plásticos Compuestos here for free.

So How Is Plásticos Compuestos' ROCE Trending?

Plásticos Compuestos has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making four years ago but is is now generating 5.2% on its capital. In addition to that, Plásticos Compuestos is employing 50% more capital than previously which is expected of a company that's 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.

The Key Takeaway

Long story short, we're delighted to see that Plásticos Compuestos' reinvestment activities have paid off and the company is now profitable. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 7.8% return over the last year. In light of that, we think it's worth looking further into this stock because if Plásticos Compuestos can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Plásticos Compuestos (of which 2 are a bit concerning!) that you should 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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