Some Investors May Be Worried About E. Pairis' (ATH:PAIR) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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.

What Is 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 E. Pairis is:

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

0.095 = €1.0m ÷ (€20m - €9.7m) (Based on the trailing twelve months to June 2022).

So, E. Pairis has an ROCE of 9.5%. Even though it's in line with the industry average of 10%, it's still a low return by itself.

Check out our latest analysis for E. Pairis

Historical performance is a great place to start when researching a stock so above you can see the gauge for E. Pairis' ROCE against it's prior returns. 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. To be more specific, ROCE has fallen from 17% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, E. Pairis has done well to pay down its current liabilities to 48% 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. Keep in mind 48% is still pretty high, so those risks are still somewhat prevalent.

The Bottom Line On E. Pairis' ROCE

In summary, despite lower returns in the short term, we're encouraged to see that E. Pairis is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 200% to shareholders in the last five years. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Like most companies, E. Pairis does come with some risks, and we've found 2 warning signs that you should be aware of.

While E. Pairis 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.