Our Take On The Returns On Capital At Pharmagest Interactive (EPA:PHA)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, while the ROCE is currently high for Pharmagest Interactive (EPA:PHA), we aren't jumping out of our chairs because returns are decreasing.

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 Pharmagest Interactive:

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

0.22 = €43m ÷ (€295m - €96m) (Based on the trailing twelve months to June 2020).

So, Pharmagest Interactive has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 10.0% earned by companies in a similar industry.

View our latest analysis for Pharmagest Interactive

In the above chart we have measured Pharmagest Interactive's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Pharmagest Interactive.

How Are Returns Trending?

When we looked at the ROCE trend at Pharmagest Interactive, we didn't gain much confidence. While it's comforting that the ROCE is high, five years ago it was 30%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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

To conclude, we've found that Pharmagest Interactive is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 481% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing, we've spotted 1 warning sign facing Pharmagest Interactive that you might find interesting.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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