Investors Could Be Concerned With Selected Textiles' (ATH:EPIL) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Selected Textiles (ATH:EPIL), it didn't seem to tick all of these boxes.

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. The formula for this calculation on Selected Textiles is:

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

0.00046 = €38k ÷ (€95m - €15m) (Based on the trailing twelve months to December 2020).

Therefore, Selected Textiles has an ROCE of 0.05%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.5%.

Check out our latest analysis for Selected Textiles

Historical performance is a great place to start when researching a stock so above you can see the gauge for Selected Textiles' ROCE against it's prior returns. If you'd like to look at how Selected Textiles has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Selected Textiles doesn't inspire confidence. Around five years ago the returns on capital were 0.1%, but since then they've fallen to 0.05%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Selected Textiles has done well to pay down its current liabilities to 15% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, we're somewhat concerned by Selected Textiles' diminishing returns on increasing amounts of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 54% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we've found 2 warning signs for Selected Textiles that we think you should be aware of.

While Selected Textiles 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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