Should We Be Excited About The Trends Of Returns At Philippos Nakas (ATH:NAKAS)?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. Having said that, from a first glance at Philippos Nakas (ATH:NAKAS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for Philippos Nakas, this is the formula:

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

0.036 = €849k ÷ (€29m - €5.2m) (Based on the trailing twelve months to June 2020).

Thus, Philippos Nakas has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 9.8%.

View our latest analysis for Philippos Nakas

Historical performance is a great place to start when researching a stock so above you can see the gauge for Philippos Nakas' ROCE against it's prior returns. If you're interested in investigating Philippos Nakas' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Philippos Nakas' ROCE Trending?

Things have been pretty stable at Philippos Nakas, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Philippos Nakas to be a multi-bagger going forward.

The Bottom Line

We can conclude that in regards to Philippos Nakas' returns on capital employed and the trends, there isn't much change to report on. Yet to long term shareholders the stock has gifted them an incredible 314% return in the last five years, so the market appears to be rosy about its future. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Philippos Nakas (of which 1 makes us a bit uncomfortable!) that you should know about.

While Philippos Nakas 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. 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.
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