Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing (ATH:MIN) and its trend of ROCE, we really liked what we saw.
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 J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = €511k ÷ (€27m - €5.8m) (Based on the trailing twelve months to December 2020).
So, J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 9.0%.
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 J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing's ROCE Trending?
J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 2.4% which is a sight for sore eyes. In addition to that, J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing is employing 219% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 22%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line
In summary, it's great to see that J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
J. & B. Ladenis Bros - Minerva - Knitwear Manufacturing does have some risks, we noticed 3 warning signs (and 2 which make us uncomfortable) we think you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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