Pipe Works L. Girakian Profil (ATH:PROFK) Is Looking To Continue Growing Its Returns On Capital

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. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Pipe Works L. Girakian Profil (ATH:PROFK) 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 Pipe Works L. Girakian Profil, this is the formula:

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

0.045 = €803k ÷ (€40m - €22m) (Based on the trailing twelve months to December 2023).

Therefore, Pipe Works L. Girakian Profil has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.6%.

View our latest analysis for Pipe Works L. Girakian Profil

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pipe Works L. Girakian Profil's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Pipe Works L. Girakian Profil.

What Can We Tell From Pipe Works L. Girakian Profil's ROCE Trend?

Shareholders will be relieved that Pipe Works L. Girakian Profil has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 4.5% on its capital. While returns have increased, the amount of capital employed by Pipe Works L. Girakian Profil has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 55% of its operations, which isn't ideal. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Key Takeaway

As discussed above, Pipe Works L. Girakian Profil appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Astute investors may have an opportunity here because the stock has declined 37% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

Pipe Works L. Girakian Profil does have some risks, we noticed 2 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

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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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.