E. Pairis' (ATH:PAIR) Returns On Capital Not Reflecting Well On The Business

By
Simply Wall St
Published
November 30, 2021
ATSE:PAIR
Source: Shutterstock

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 briefly looking over the numbers, we don't think E. Pairis (ATH:PAIR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

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 E. Pairis:

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

0.026 = €266k ÷ (€16m - €5.9m) (Based on the trailing twelve months to June 2021).

Thus, E. Pairis has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Packaging industry average of 10%.

Check out our latest analysis for E. Pairis

roce
ATSE:PAIR Return on Capital Employed December 1st 2021

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 E. Pairis, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at E. Pairis doesn't inspire confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 2.6%. However it looks like E. Pairis might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, E. Pairis has done well to pay down its current liabilities to 36% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From E. Pairis' ROCE

Bringing it all together, while we're somewhat encouraged by E. Pairis' reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 449% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

E. Pairis does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those make us uncomfortable...

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.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.