Will Plásticos Compuestos' (BME:KOM) Growth In ROCE Persist?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Plásticos Compuestos (BME:KOM) looks quite promising in regards to its trends of return on capital.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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).

Therefore, Plásticos Compuestos has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 9.4%.

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?

We're delighted to see that Plásticos Compuestos is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses four years ago, but now it's earning 5.2% which is a sight for sore eyes. 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 Bottom Line

Overall, Plásticos Compuestos gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has fallen 21% over the last year, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about Plásticos Compuestos, we've spotted 4 warning signs, and 1 of them is potentially serious.

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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