Returns Are Gaining Momentum At Granolio d.d (ZGSE:GRNL)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Granolio d.d's (ZGSE:GRNL) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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 Granolio d.d, this is the formula:

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

0.096 = €3.9m ÷ (€66m - €26m) (Based on the trailing twelve months to December 2023).

So, Granolio d.d has an ROCE of 9.6%. In absolute terms, that's a low return but it's around the Food industry average of 9.1%.

See our latest analysis for Granolio d.d

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

What The Trend Of ROCE Can Tell Us

Like most people, we're pleased that Granolio d.d is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 9.6% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 49%. This could potentially mean that the company is selling some of its assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 39% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

Our Take On Granolio d.d's ROCE

From what we've seen above, Granolio d.d has managed to increase it's returns on capital all the while reducing it's capital base. And a remarkable 265% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

On a final note, we found 4 warning signs for Granolio d.d (1 is a bit concerning) you should be aware of.

While Granolio d.d isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.