Shareholders Would Enjoy A Repeat Of Interwood-Xylemporia A.T.E.N.E's (ATH:XYLEK) Recent Growth In Returns

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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.

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. 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)

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

So, Interwood-Xylemporia A.T.E.N.E has an ROCE of 20%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 15%.

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'd like to look at how Interwood-Xylemporia A.T.E.N.E has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Interwood-Xylemporia A.T.E.N.E's ROCE Trending?

Interwood-Xylemporia A.T.E.N.E's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 486% 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. 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. Effectively this means that suppliers or short-term creditors are now funding 50% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

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. And a remarkable 106% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Interwood-Xylemporia A.T.E.N.E can keep these trends up, it could have a bright future ahead.

One more thing, we've spotted 2 warning signs facing Interwood-Xylemporia A.T.E.N.E that you might find interesting.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.