Returns on Capital Paint A Bright Future For ESOTIQ & Henderson (WSE:EAH)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of ESOTIQ & Henderson (WSE:EAH) we really liked what we saw.

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

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. The formula for this calculation on ESOTIQ & Henderson is:

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

0.21 = zł19m ÷ (zł167m - zł80m) (Based on the trailing twelve months to September 2022).

Therefore, ESOTIQ & Henderson has an ROCE of 21%. In absolute terms that's a very respectable return and compared to the Luxury industry average of 20% it's pretty much on par.

Check out 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?

ESOTIQ & Henderson is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 21%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 88%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, ESOTIQ & Henderson's current liabilities are still rather high at 48% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From ESOTIQ & Henderson's ROCE

All in all, it's terrific to see that ESOTIQ & Henderson is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 14% 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.

ESOTIQ & Henderson does have some risks though, and we've spotted 4 warning signs for ESOTIQ & Henderson that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.