Interwood-Xylemporia A.T.E.N.E (ATH:XYLEK) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, we've noticed some promising trends at Interwood-Xylemporia A.T.E.N.E (ATH:XYLEK) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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 Interwood-Xylemporia A.T.E.N.E is:

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

0.027 = €715k ÷ (€47m - €20m) (Based on the trailing twelve months to June 2020).

Thus, Interwood-Xylemporia A.T.E.N.E has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 11%.

Check out our latest analysis for Interwood-Xylemporia A.T.E.N.E

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 want to delve into the historical earnings, revenue and cash flow of Interwood-Xylemporia A.T.E.N.E, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Interwood-Xylemporia A.T.E.N.E is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 2.7% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 25% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. This could potentially mean that the company is selling some of its assets.

On a separate but related note, it's important to know that Interwood-Xylemporia A.T.E.N.E has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Interwood-Xylemporia A.T.E.N.E's ROCE

In a nutshell, we're pleased to see that Interwood-Xylemporia A.T.E.N.E has been able to generate higher returns from less capital. And a remarkable 297% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Interwood-Xylemporia A.T.E.N.E we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

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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