Investors Could Be Concerned With Karelia Tobacco's (ATH:KARE) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Karelia Tobacco (ATH:KARE) 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)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Karelia Tobacco:

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

0.16 = €87m ÷ (€628m - €87m) (Based on the trailing twelve months to September 2020).

Therefore, Karelia Tobacco has an ROCE of 16%. That's a relatively normal return on capital, and it's around the 15% generated by the Tobacco industry.

See our latest analysis for Karelia Tobacco

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

What Can We Tell From Karelia Tobacco's ROCE Trend?

On the surface, the trend of ROCE at Karelia Tobacco doesn't inspire confidence. Over the last five years, returns on capital have decreased to 16% from 25% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Karelia Tobacco has done well to pay down its current liabilities to 14% 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.

The Bottom Line On Karelia Tobacco's ROCE

To conclude, we've found that Karelia Tobacco is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 41% over the last five years. 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 Karelia Tobacco you'll probably want to know about.

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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