Biokarpet (ATH:BIOKA) Is Experiencing Growth In Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Biokarpet (ATH:BIOKA) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Biokarpet:

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

0.034 = €3.5m ÷ (€144m - €40m) (Based on the trailing twelve months to December 2020).

So, Biokarpet has an ROCE of 3.4%. Even though it's in line with the industry average of 3.4%, it's still a low return by itself.

Check out our latest analysis for Biokarpet

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

What Can We Tell From Biokarpet's ROCE Trend?

Shareholders will be relieved that Biokarpet has broken into profitability. The company now earns 3.4% on its capital, because five years ago it was incurring losses. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. Because in the end, a business can only get so efficient.

The Bottom Line

As discussed above, Biokarpet appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Biokarpet does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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