Is There More Growth In Store For ERAMET's (EPA:ERA) Returns On Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at ERAMET (EPA:ERA) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on ERAMET is:

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

0.008 = €43m ÷ (€6.1b - €779m) (Based on the trailing twelve months to December 2020).

Therefore, ERAMET has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.6%.

See our latest analysis for ERAMET

In the above chart we have measured ERAMET'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 ERAMET.

So How Is ERAMET's ROCE Trending?

ERAMET has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 0.8% which is a sight for sore eyes. In addition to that, ERAMET is employing 37% 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 13%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From ERAMET's ROCE

Overall, ERAMET 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 a remarkable 127% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing ERAMET, we've discovered 1 warning sign that you should be aware of.

While ERAMET may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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