I.Kloukinas-I.Lappas' (ATH:KLM) Returns On Capital Not Reflecting Well On The Business

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at I.Kloukinas-I.Lappas (ATH:KLM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. Analysts use this formula to calculate it for I.Kloukinas-I.Lappas:

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

0.012 = €991k ÷ (€93m - €8.3m) (Based on the trailing twelve months to June 2021).

So, I.Kloukinas-I.Lappas has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 5.4%.

See our latest analysis for I.Kloukinas-I.Lappas

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'd like to look at how I.Kloukinas-I.Lappas has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From I.Kloukinas-I.Lappas' ROCE Trend?

In terms of I.Kloukinas-I.Lappas' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.2% from 2.9% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From I.Kloukinas-I.Lappas' ROCE

In summary, I.Kloukinas-I.Lappas is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 82% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you'd like to know more about I.Kloukinas-I.Lappas, we've spotted 3 warning signs, and 1 of them is significant.

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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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.