Returns On Capital At Evrofarma (ATH:EVROF) Have Stalled

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Evrofarma (ATH:EVROF) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Evrofarma:

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

0.12 = €4.5m ÷ (€54m - €17m) (Based on the trailing twelve months to June 2023).

Therefore, Evrofarma has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.5% generated by the Food industry.

Check out our latest analysis for Evrofarma

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

So How Is Evrofarma's ROCE Trending?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 12% for the last five years, and the capital employed within the business has risen 87% in that time. 12% is a pretty standard return, and it provides some comfort knowing that Evrofarma has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 32% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk.

Our Take On Evrofarma's ROCE

The main thing to remember is that Evrofarma has proven its ability to continually reinvest at respectable rates of return. And since the stock has risen strongly over the last five years, it appears the market might expect this trend to continue. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

Evrofarma does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While Evrofarma 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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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.