Returns At Farmaceutica REMEDIA (BVB:RMAH) Are On The Way Up

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Farmaceutica REMEDIA (BVB:RMAH) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 Farmaceutica REMEDIA is:

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

0.11 = RON7.3m ÷ (RON271m - RON202m) (Based on the trailing twelve months to September 2022).

Therefore, Farmaceutica REMEDIA has an ROCE of 11%. By itself that's a normal return on capital and it's in line with the industry's average returns of 11%.

Check out our latest analysis for Farmaceutica REMEDIA

Historical performance is a great place to start when researching a stock so above you can see the gauge for Farmaceutica REMEDIA's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Farmaceutica REMEDIA, check out these free graphs here.

How Are Returns Trending?

We like the trends that we're seeing from Farmaceutica REMEDIA. The data shows that returns on capital have increased substantially over the last five years to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 55% more capital is being employed now too. So we're very much inspired by what we're seeing at Farmaceutica REMEDIA thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Farmaceutica REMEDIA has a current liabilities to total assets ratio of 75%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Farmaceutica REMEDIA's ROCE

In summary, it's great to see that Farmaceutica REMEDIA can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 99% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One more thing to note, we've identified 3 warning signs with Farmaceutica REMEDIA and understanding these should be part of your investment process.

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.