There's Been No Shortage Of Growth Recently For Athens Medical C.S.A's (ATH:IATR) Returns On 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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. With that in mind, we've noticed some promising trends at Athens Medical C.S.A (ATH:IATR) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.051 = €9.7m ÷ (€420m - €231m) (Based on the trailing twelve months to December 2020).

Thus, Athens Medical C.S.A has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 7.9%.

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 want to delve into the historical earnings, revenue and cash flow of Athens Medical C.S.A, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Athens Medical C.S.A is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 5.1% which is a sight for sore eyes. Not only that, but the company is utilizing 90% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

One more thing to note, Athens Medical C.S.A has decreased current liabilities to 55% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Athens Medical C.S.A has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line

Overall, Athens Medical C.S.A gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing: We've identified 2 warning signs with Athens Medical C.S.A (at least 1 which is potentially serious) , and understanding them would certainly be useful.

While Athens Medical C.S.A 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.
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