There Are Reasons To Feel Uneasy About Athens Medical C.S.A's (ATH:IATR) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. 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.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Athens Medical C.S.A is:

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

0.078 = €21m ÷ (€412m - €138m) (Based on the trailing twelve months to June 2022).

Thus, Athens Medical C.S.A has an ROCE of 7.8%. Even though it's in line with the industry average of 7.7%, it's still a low return by itself.

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

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

What Can We Tell From Athens Medical C.S.A's ROCE Trend?

When we looked at the ROCE trend at Athens Medical C.S.A, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 7.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Athens Medical C.S.A has done well to pay down its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Athens Medical C.S.A's ROCE

While returns have fallen for Athens Medical C.S.A in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 2.1% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

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.