Flour Mills Kepenos (ATH:KEPEN) May Have Issues Allocating Its Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Flour Mills Kepenos (ATH:KEPEN), it didn't seem to tick all of these boxes.

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

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 Flour Mills Kepenos, this is the formula:

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

0.052 = €2.0m ÷ (€41m - €2.7m) (Based on the trailing twelve months to December 2020).

Thus, Flour Mills Kepenos has an ROCE of 5.2%. In absolute terms, that's a low return, but it's much better than the Food industry average of 4.2%.

View our latest analysis for Flour Mills Kepenos

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'd like to look at how Flour Mills Kepenos has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From Flour Mills Kepenos' ROCE Trend?

In terms of Flour Mills Kepenos' historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.1%, but since then they've fallen to 5.2%. 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 related note, Flour Mills Kepenos has decreased its current liabilities to 6.5% 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.

The Bottom Line On Flour Mills Kepenos' ROCE

To conclude, we've found that Flour Mills Kepenos is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 121% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Flour Mills Kepenos (of which 1 is a bit unpleasant!) that you should know about.

While Flour Mills Kepenos 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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