Interwood-Xylemporia A.T.E.N.E (ATH:XYLEK) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Interwood-Xylemporia A.T.E.N.E's (ATH:XYLEK) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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

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

0.19 = €4.2m ÷ (€42m - €19m) (Based on the trailing twelve months to December 2021).

So, Interwood-Xylemporia A.T.E.N.E has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Trade Distributors industry average of 15% it's much better.

See 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're interested in investigating Interwood-Xylemporia A.T.E.N.E's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Interwood-Xylemporia A.T.E.N.E's ROCE Trend?

We're pretty happy with how the ROCE has been trending at Interwood-Xylemporia A.T.E.N.E. We found that the returns on capital employed over the last five years have risen by 378%. The company is now earning €0.2 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 24% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, Interwood-Xylemporia A.T.E.N.E's current liabilities are still rather high at 46% of total assets. 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 Key Takeaway

From what we've seen above, Interwood-Xylemporia A.T.E.N.E has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has returned a solid 100% 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.

One more thing to note, we've identified 2 warning signs with Interwood-Xylemporia A.T.E.N.E and understanding them should be part of your investment process.

While Interwood-Xylemporia A.T.E.N.E isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.