Some Investors May Be Worried About Flour Mills Kepenos' (ATH:KEPEN) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. Having said that, from a first glance at Flour Mills Kepenos (ATH:KEPEN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

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. 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)

0.032 = €1.4m ÷ (€61m - €18m) (Based on the trailing twelve months to December 2021).

So, Flour Mills Kepenos has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Food industry average of 8.3%.

Check out our latest analysis for Flour Mills Kepenos

Historical performance is a great place to start when researching a stock so above you can see the gauge for Flour Mills Kepenos' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Flour Mills Kepenos, check out these free graphs here.

The Trend Of ROCE

When we looked at the ROCE trend at Flour Mills Kepenos, we didn't gain much confidence. To be more specific, ROCE has fallen from 11% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 30%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Flour Mills Kepenos' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Flour Mills Kepenos is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 78% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One more thing: We've identified 4 warning signs with Flour Mills Kepenos (at least 2 which are concerning) , and understanding these would certainly be useful.

While Flour Mills Kepenos 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.