Selected Textiles (ATH:EPIL) Is Doing The Right Things To Multiply Its Share Price

By
Simply Wall St
Published
January 04, 2022
ATSE:EPIL
Source: Shutterstock

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So on that note, Selected Textiles (ATH:EPIL) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Selected Textiles:

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

0.034 = €1.2m ÷ (€88m - €52m) (Based on the trailing twelve months to June 2021).

Therefore, Selected Textiles has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 7.5%.

View our latest analysis for Selected Textiles

roce
ATSE:EPIL Return on Capital Employed January 4th 2022

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 Selected Textiles, check out these free graphs here.

How Are Returns Trending?

Like most people, we're pleased that Selected Textiles is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, Selected Textiles is using 32% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.

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. The current liabilities has increased to 59% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. 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.

What We Can Learn From Selected Textiles' ROCE

From what we've seen above, Selected Textiles has managed to increase it's returns on capital all the while reducing it's capital base. And with a respectable 81% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Selected Textiles can keep these trends up, it could have a bright future ahead.

If you want to continue researching Selected Textiles, you might be interested to know about the 2 warning signs that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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