Euroconsultants (ATH:EUROC) Is Achieving High Returns On Its Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Speaking of which, we noticed some great changes in Euroconsultants' (ATH:EUROC) returns on capital, so let's have a look.

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Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Euroconsultants, this is the formula:

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

0.23 = €2.0m ÷ (€10.0m - €1.4m) (Based on the trailing twelve months to June 2024).

Therefore, Euroconsultants has an ROCE of 23%. While that is an outstanding return, the rest of the IT industry generates similar returns, on average.

See our latest analysis for Euroconsultants

Historical performance is a great place to start when researching a stock so above you can see the gauge for Euroconsultants' ROCE against it's prior returns. If you'd like to look at how Euroconsultants has performed in the past in other metrics, you can view this free graph of Euroconsultants' past earnings, revenue and cash flow.

What Does the ROCE Trend For Euroconsultants Tell Us?

Euroconsultants has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 23% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Euroconsultants is utilizing 1,706% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Euroconsultants has decreased current liabilities to 14% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

In Conclusion...

In summary, it's great to see that Euroconsultants has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 3 warning signs for Euroconsultants you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.