Investors Will Want Farminveste S.G.P.S' (ELI:MLFMV) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Farminveste S.G.P.S (ELI:MLFMV) so let's look a bit deeper.

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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. To calculate this metric for Farminveste S.G.P.S, this is the formula:

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

0.058 = €22m ÷ (€625m - €251m) (Based on the trailing twelve months to December 2023).

Therefore, Farminveste S.G.P.S has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 8.8%.

Check out our latest analysis for Farminveste S.G.P.S

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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Farminveste S.G.P.S.

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

Farminveste S.G.P.S' ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 32% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Another thing to note, Farminveste S.G.P.S has a high ratio of current liabilities to total assets of 40%. 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.

In Conclusion...

To sum it up, Farminveste S.G.P.S is collecting higher returns from the same amount of capital, and that's impressive. However the stock is down a substantial 77% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

One more thing: We've identified 3 warning signs with Farminveste S.G.P.S (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.

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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.