There Are Reasons To Feel Uneasy 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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. 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?

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 Flour Mills Kepenos:

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

0.059 = €2.0m ÷ (€40m - €6.3m) (Based on the trailing twelve months to June 2020).

So, Flour Mills Kepenos has an ROCE of 5.9%. Ultimately, that's a low return and it under-performs the Food industry average of 8.0%.

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 want to delve into the historical earnings, revenue and cash flow of Flour Mills Kepenos, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Flour Mills Kepenos doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Flour Mills Kepenos has decreased its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. 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 Flour Mills Kepenos' ROCE

To conclude, we've found that Flour Mills Kepenos is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 38% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to know some of the risks facing Flour Mills Kepenos we've found 4 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

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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