If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Patentus (WSE:PAT) so let's look a bit deeper.
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. The formula for this calculation on Patentus is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = zł6.5m ÷ (zł158m - zł23m) (Based on the trailing twelve months to September 2020).
Therefore, Patentus has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 7.2%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Patentus' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Patentus, check out these free graphs here.
How Are Returns Trending?
While the ROCE isn't as high as some other companies out there, it's great to see it's on the up. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 273% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
The Bottom Line On Patentus' ROCE
To sum it up, Patentus is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 81% awarded to those who held the stock over the last five years, 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.
On a final note, we found 2 warning signs for Patentus (1 can't be ignored) you should be aware of.
While Patentus 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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