Here's What Pharmagest Interactive's (EPA:PHA) Strong Returns On Capital Mean

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, the ROCE of Pharmagest Interactive (EPA:PHA) looks attractive right now, so lets see what the trend of returns can tell us.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Pharmagest Interactive:

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

0.25 = €51m ÷ (€303m - €100m) (Based on the trailing twelve months to June 2021).

Therefore, Pharmagest Interactive has an ROCE of 25%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

View our latest analysis for Pharmagest Interactive

Above you can see how the current ROCE for Pharmagest Interactive 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 Pharmagest Interactive here for free.

What The Trend Of ROCE Can Tell Us

Pharmagest Interactive deserves to be commended in regards to it's returns. The company has employed 101% more capital in the last five years, and the returns on that capital have remained stable at 25%. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Bottom Line On Pharmagest Interactive's ROCE

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. And the stock has done incredibly well with a 125% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

While Pharmagest Interactive looks impressive, no company is worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether PHA is currently trading for a fair price.

Pharmagest Interactive is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.