Kumulus Vape's (EPA:ALVAP) Returns On Capital Not Reflecting Well On The Business

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at Kumulus Vape (EPA:ALVAP), they do have a high ROCE, but we weren't exactly elated from how returns are trending.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Kumulus Vape:

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

0.21 = €1.9m ÷ (€11m - €2.2m) (Based on the trailing twelve months to June 2021).

So, Kumulus Vape has an ROCE of 21%. In absolute terms that's a very respectable return and compared to the Online Retail industry average of 18% it's pretty much on par.

Check out our latest analysis for Kumulus Vape

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

How Are Returns Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 27% four years ago, while the business's capital employed increased by 2,030%. That being said, Kumulus Vape raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Kumulus Vape probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

On a side note, Kumulus Vape has done well to pay down its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Kumulus Vape's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kumulus Vape. Furthermore the stock has climbed 68% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

On a separate note, we've found 2 warning signs for Kumulus Vape you'll probably want to know about.

Kumulus Vape 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.

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.