Is There More Growth In Store For Petros Petropoulos AEBE's (ATH:PETRO) Returns On Capital?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Petros Petropoulos AEBE's (ATH:PETRO) returns on capital, so let's have a look.

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

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 Petros Petropoulos AEBE, this is the formula:

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

0.14 = €6.6m ÷ (€71m - €23m) (Based on the trailing twelve months to September 2020).

So, Petros Petropoulos AEBE has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.4% generated by the Machinery industry.

Check out our latest analysis for Petros Petropoulos AEBE

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Petros Petropoulos AEBE's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Petros Petropoulos AEBE Tell Us?

Petros Petropoulos AEBE's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 48% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

On a related note, the company's ratio of current liabilities to total assets has decreased to 33%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Bottom Line

To sum it up, Petros Petropoulos AEBE is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has returned a solid 59% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Petros Petropoulos AEBE does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

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.

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