Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Artprice.com (EPA:PRC), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
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. The formula for this calculation on Artprice.com is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = €924k ÷ (€22m - €980k) (Based on the trailing twelve months to December 2020).
Thus, Artprice.com has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Interactive Media and Services industry average of 8.1%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Artprice.com's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Artprice.com, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
In terms of Artprice.com's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 6.1%, but since then they've fallen to 4.3%. 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.
What We Can Learn From Artprice.com's ROCE
To conclude, we've found that Artprice.com is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 51% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Artprice.com has the makings of a multi-bagger.
One more thing, we've spotted 1 warning sign facing Artprice.com that you might find interesting.
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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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.
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