Interwood-Xylemporia A.T.E.N.E (ATH:XYLEK) Knows How To Allocate Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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)

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 Interwood-Xylemporia A.T.E.N.E, this is the formula:

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

0.20 = €5.1m ÷ (€49m - €25m) (Based on the trailing twelve months to June 2022).

Thus, Interwood-Xylemporia A.T.E.N.E has an ROCE of 20%. That's a fantastic return and not only that, it outpaces the average of 15% earned by companies in a similar industry.

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'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 Does the ROCE Trend For Interwood-Xylemporia A.T.E.N.E Tell Us?

Interwood-Xylemporia A.T.E.N.E has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 486% over the last five years. 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. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 50% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

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

In summary, we're delighted to see that Interwood-Xylemporia A.T.E.N.E has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 252% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

Interwood-Xylemporia A.T.E.N.E does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

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

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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.