Athens Medical C.S.A's (ATH:IATR) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Athens Medical C.S.A (ATH:IATR), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Athens Medical C.S.A:

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

0.085 = €24m ÷ (€457m - €170m) (Based on the trailing twelve months to June 2023).

So, Athens Medical C.S.A has an ROCE of 8.5%. Even though it's in line with the industry average of 8.2%, it's still a low return by itself.

See our latest analysis for Athens Medical C.S.A

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 Athens Medical C.S.A has performed in the past in other metrics, you can view this free graph of Athens Medical C.S.A's past earnings, revenue and cash flow.

What Does the ROCE Trend For Athens Medical C.S.A Tell Us?

On the surface, the trend of ROCE at Athens Medical C.S.A doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 8.5%. However it looks like Athens Medical C.S.A might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Athens Medical C.S.A has decreased its current liabilities to 37% 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.

In Conclusion...

To conclude, we've found that Athens Medical C.S.A is reinvesting in the business, but returns have been falling. Since the stock has declined 16% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

Athens Medical C.S.A does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Athens Medical C.S.A isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com