Here's What's Concerning About Equasens Société anonyme's (EPA:EQS) Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Looking at Equasens Société anonyme (EPA:EQS), it does have a high ROCE right now, but lets see how returns are trending.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Equasens Société anonyme:

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

0.22 = €51m ÷ (€345m - €115m) (Based on the trailing twelve months to June 2022).

So, Equasens Société anonyme has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Healthcare Services industry average of 11%.

Our analysis indicates that EQS is potentially undervalued!

Above you can see how the current ROCE for Equasens Société anonyme compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Equasens Société anonyme.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Equasens Société anonyme doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 28%. However it looks like Equasens Société anonyme might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Equasens Société anonyme's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 87% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

If you're still interested in Equasens Société anonyme it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.