Returns On Capital Are Showing Encouraging Signs At Papoutsanis (ATH:PAP)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Papoutsanis (ATH:PAP) 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. To calculate this metric for Papoutsanis, this is the formula:

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

0.16 = €5.8m ÷ (€53m - €17m) (Based on the trailing twelve months to March 2021).

Therefore, Papoutsanis has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Personal Products industry average of 9.5% it's much better.

View our latest analysis for Papoutsanis

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 Papoutsanis, check out these free graphs here.

What Can We Tell From Papoutsanis' ROCE Trend?

Investors would be pleased with what's happening at Papoutsanis. Over the last five years, returns on capital employed have risen substantially to 16%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 34%. So we're very much inspired by what we're seeing at Papoutsanis thanks to its ability to profitably reinvest capital.

The Key Takeaway

In summary, it's great to see that Papoutsanis can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 817% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, Papoutsanis does come with some risks, and we've found 3 warning signs that you should be aware of.

While Papoutsanis 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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