Is Esautomotion (BIT:ESAU) Likely To Turn Things Around?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Esautomotion (BIT:ESAU), we don't think it's current trends fit the mold of a multi-bagger.

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 Esautomotion, this is the formula:

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

0.07 = €1.1m ÷ (€20m - €4.4m) (Based on the trailing twelve months to June 2020).

Therefore, Esautomotion has an ROCE of 7.0%. On its own that's a low return, but compared to the average of 5.3% generated by the Machinery industry, it's much better.

View our latest analysis for Esautomotion

Above you can see how the current ROCE for Esautomotion compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Esautomotion here for free.

What Can We Tell From Esautomotion's ROCE Trend?

When we looked at the ROCE trend at Esautomotion, we didn't gain much confidence. To be more specific, ROCE has fallen from 53% over the last three years. However it looks like Esautomotion might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Esautomotion has decreased its current liabilities to 22% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Esautomotion's ROCE

To conclude, we've found that Esautomotion is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 22% over the last year, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing Esautomotion, we've discovered 4 warning signs that you should be aware of.

While Esautomotion 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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