Farminveste S.G.P.S (ELI:MLFMV) Has More To Do To Multiply In Value Going Forward

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Farminveste S.G.P.S (ELI:MLFMV) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Farminveste S.G.P.S is:

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

0.07 = €24m ÷ (€603m - €252m) (Based on the trailing twelve months to December 2021).

Thus, Farminveste S.G.P.S has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 8.9%.

See our latest analysis for Farminveste S.G.P.S

Historical performance is a great place to start when researching a stock so above you can see the gauge for Farminveste S.G.P.S' ROCE against it's prior returns. If you're interested in investigating Farminveste S.G.P.S' past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Farminveste S.G.P.S Tell Us?

Things have been pretty stable at Farminveste S.G.P.S, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Farminveste S.G.P.S to be a multi-bagger going forward.

Another thing to note, Farminveste S.G.P.S has a high ratio of current liabilities to total assets of 42%. 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.

What We Can Learn From Farminveste S.G.P.S' ROCE

In summary, Farminveste S.G.P.S isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And investors appear hesitant that the trends will pick up because the stock has fallen 58% in the last three years. Therefore based on the analysis done in this article, we don't think Farminveste S.G.P.S has the makings of a multi-bagger.

If you'd like to know more about Farminveste S.G.P.S, we've spotted 4 warning signs, and 3 of them are a bit concerning.

While Farminveste S.G.P.S 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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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.