Laboratorio Farmaceutico Erfo (BIT:ERFO) Might Be Having Difficulty Using Its Capital Effectively

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Laboratorio Farmaceutico Erfo (BIT:ERFO), it didn't seem to tick all of these boxes.

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What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Laboratorio Farmaceutico Erfo, this is the formula:

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

0.062 = €524k ÷ (€9.7m - €1.2m) (Based on the trailing twelve months to December 2024).

Thus, Laboratorio Farmaceutico Erfo has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 13%.

Check out our latest analysis for Laboratorio Farmaceutico Erfo

Above you can see how the current ROCE for Laboratorio Farmaceutico Erfo 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 Laboratorio Farmaceutico Erfo for free.

What Can We Tell From Laboratorio Farmaceutico Erfo's ROCE Trend?

In terms of Laboratorio Farmaceutico Erfo's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 54%, but since then they've fallen to 6.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Laboratorio Farmaceutico Erfo has done well to pay down its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. 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.

The Bottom Line

To conclude, we've found that Laboratorio Farmaceutico Erfo is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 20% in the last three years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a separate note, we've found 4 warning signs for Laboratorio Farmaceutico Erfo you'll probably want to know about.

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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.