Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at Pipe Works L. Girakian Profil (ATH:PROFK) and its trend of ROCE, we really liked what we saw.
What is 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 Pipe Works L. Girakian Profil:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = €222k ÷ (€26m - €11m) (Based on the trailing twelve months to December 2020).
Thus, Pipe Works L. Girakian Profil has an ROCE of 1.5%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.7%.
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'd like to look at how Pipe Works L. Girakian Profil has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Pipe Works L. Girakian Profil is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 1.5% which is a sight for sore eyes. Not only that, but the company is utilizing 117% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
One more thing to note, Pipe Works L. Girakian Profil has decreased current liabilities to 42% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.
The Bottom Line On Pipe Works L. Girakian Profil's ROCE
In summary, it's great to see that Pipe Works L. Girakian Profil has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 2,733% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
On a final note, we found 3 warning signs for Pipe Works L. Girakian Profil (2 are significant) you should be aware of.
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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