Elektroimportøren (OB:ELIMP) Is Very Good At Capital Allocation

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Elektroimportøren (OB:ELIMP) looks great, so lets see what the trend can tell us.

What is 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. Analysts use this formula to calculate it for Elektroimportøren:

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

0.37 = kr136m ÷ (kr644m - kr277m) (Based on the trailing twelve months to June 2021).

Therefore, Elektroimportøren has an ROCE of 37%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 13%.

See our latest analysis for Elektroimportøren

In the above chart we have measured Elektroimportøren's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Elektroimportøren here for free.

The Trend Of ROCE

The trends we've noticed at Elektroimportøren are quite reassuring. Over the last three years, returns on capital employed have risen substantially to 37%. The amount of capital employed has increased too, by 27%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Another thing to note, Elektroimportøren has a high ratio of current liabilities to total assets of 43%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

All in all, it's terrific to see that Elektroimportøren is reaping the rewards from prior investments and is growing its capital base. And with a respectable 41% awarded to those who held the stock over the last year, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Elektroimportøren does have some risks though, and we've spotted 2 warning signs for Elektroimportøren that you might be interested in.

Elektroimportøren is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.