Here's What To Make Of EuKedos' (BIT:EUK) Decelerating Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at EuKedos (BIT:EUK) and its ROCE trend, we weren't exactly thrilled.

Understanding 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 EuKedos, this is the formula:

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

0.025 = €3.3m ÷ (€150m - €17m) (Based on the trailing twelve months to December 2021).

Therefore, EuKedos has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 7.0%.

See our latest analysis for EuKedos

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

What Does the ROCE Trend For EuKedos Tell Us?

In terms of EuKedos' historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 2.5% for the last five years, and the capital employed within the business has risen 168% in that time. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.

On a side note, EuKedos has done well to reduce current liabilities to 11% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line On EuKedos' ROCE

Long story short, while EuKedos has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 41% over the last five years, 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.

EuKedos does have some risks, we noticed 4 warning signs (and 1 which is concerning) we think you should know about.

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.