Returns On Capital Are Showing Encouraging Signs At Groupe Parot (EPA:ALPAR)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. So on that note, Groupe Parot (EPA:ALPAR) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Groupe Parot, this is the formula:

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

0.14 = €7.6m ÷ (€173m - €118m) (Based on the trailing twelve months to December 2022).

Therefore, Groupe Parot has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 6.3% generated by the Specialty Retail industry.

Check out our latest analysis for Groupe Parot

Historical performance is a great place to start when researching a stock so above you can see the gauge for Groupe Parot's ROCE against it's prior returns. If you're interested in investigating Groupe Parot's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Groupe Parot is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 909% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 68%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line On Groupe Parot's ROCE

To bring it all together, Groupe Parot has done well to increase the returns it's generating from its capital employed. Although the company may be facing some issues elsewhere since the stock has plunged 76% in the last five years. Still, it's worth doing some further research to see if the trends will continue into the future.

If you'd like to know about the risks facing Groupe Parot, we've discovered 4 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.