Elgeka (ATH:ELGEK) Will Want To Turn Around Its Return Trends

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Elgeka (ATH:ELGEK) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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 Elgeka, this is the formula:

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

0.071 = €6.5m ÷ (€150m - €58m) (Based on the trailing twelve months to June 2023).

Therefore, Elgeka has an ROCE of 7.1%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 11%.

Check out our latest analysis for Elgeka

Historical performance is a great place to start when researching a stock so above you can see the gauge for Elgeka's ROCE against it's prior returns. If you're interested in investigating Elgeka's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Elgeka's ROCE Trending?

In terms of Elgeka's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 9.9% over the last five years. However it looks like Elgeka might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Elgeka has done well to pay down its current liabilities to 39% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Elgeka's ROCE

To conclude, we've found that Elgeka is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 254% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 1 warning sign for Elgeka you'll probably want to know about.

While Elgeka may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.