Will Papoutsanis' (ATH:PAP) Growth In ROCE Persist?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. 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)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Papoutsanis:

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

0.14 = €5.3m ÷ (€50m - €13m) (Based on the trailing twelve months to September 2020).

Thus, Papoutsanis has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 9.5% generated by the Personal Products industry.

View our latest analysis for Papoutsanis

Above you can see how the current ROCE for Papoutsanis compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Papoutsanis here for free.

The Trend Of ROCE

Papoutsanis has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 14% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Papoutsanis is utilizing 47% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

The Bottom Line On Papoutsanis' ROCE

Long story short, we're delighted to see that Papoutsanis' reinvestment activities have paid off and the company is now profitable. And a remarkable 562% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Papoutsanis can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 2 warning signs with Papoutsanis and understanding these should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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