Returns On Capital At Estoril Sol SGPS (ELI:ESON) Have Hit The Brakes

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Estoril Sol SGPS (ELI:ESON) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Estoril Sol SGPS is:

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

0.13 = €13m ÷ (€133m - €36m) (Based on the trailing twelve months to December 2021).

Therefore, Estoril Sol SGPS has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.6% generated by the Hospitality industry.

See our latest analysis for Estoril Sol SGPS

Historical performance is a great place to start when researching a stock so above you can see the gauge for Estoril Sol SGPS' ROCE against it's prior returns. If you'd like to look at how Estoril Sol SGPS has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

There hasn't been much to report for Estoril Sol SGPS' returns and its level of capital employed because both metrics have been steady for the past five years. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So unless we see a substantial change at Estoril Sol SGPS in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.

On a side note, Estoril Sol SGPS has done well to reduce current liabilities to 27% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line

We can conclude that in regards to Estoril Sol SGPS' returns on capital employed and the trends, there isn't much change to report on. And investors appear hesitant that the trends will pick up because the stock has fallen 29% in the last three years. Therefore based on the analysis done in this article, we don't think Estoril Sol SGPS has the makings of a multi-bagger.

Estoril Sol SGPS does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.