If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. With that in mind, we've noticed some promising trends at Domiki Kritis (ATH:DOMIK) so let's look a bit deeper.
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. To calculate this metric for Domiki Kritis, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = €1.9m ÷ (€22m - €9.2m) (Based on the trailing twelve months to December 2020).
So, Domiki Kritis has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Construction industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Domiki Kritis' ROCE against it's prior returns. If you're interested in investigating Domiki Kritis' past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Domiki Kritis has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 612% 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. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
On a separate but related note, it's important to know that Domiki Kritis has a current liabilities to total assets ratio of 41%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Domiki Kritis' ROCE
In summary, we're delighted to see that Domiki Kritis has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. 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.
One more thing: We've identified 3 warning signs with Domiki Kritis (at least 1 which is a bit concerning) , and understanding them would certainly be useful.
While Domiki Kritis 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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