ESOTIQ & Henderson (WSE:EAH) Is Achieving High Returns On Its Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of ESOTIQ & Henderson (WSE:EAH) looks great, so lets see what the trend can tell us.

Return On Capital Employed (ROCE): What Is It?

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 ESOTIQ & Henderson is:

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

0.27 = zł23m ÷ (zł156m - zł69m) (Based on the trailing twelve months to March 2022).

Therefore, ESOTIQ & Henderson has an ROCE of 27%. In absolute terms that's a very respectable return and compared to the Luxury industry average of 23% it's pretty much on par.

View our latest analysis for ESOTIQ & Henderson

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating ESOTIQ & Henderson's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For ESOTIQ & Henderson Tell Us?

We're delighted to see that ESOTIQ & Henderson is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 27% which is a sight for sore eyes. In addition to that, ESOTIQ & Henderson is employing 64% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

Another thing to note, ESOTIQ & Henderson has a high ratio of current liabilities to total assets of 44%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On ESOTIQ & Henderson's ROCE

Overall, ESOTIQ & Henderson gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Since the stock has only returned 33% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One final note, you should learn about the 3 warning signs we've spotted with ESOTIQ & Henderson (including 1 which is significant) .

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.