Many Would Be Envious Of European Eltech's (MCX:EELT) Excellent Returns On Capital

By
Simply Wall St
Published
February 25, 2022
MISX:EELT
Source: Shutterstock

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at European Eltech (MCX:EELT), we liked what we saw.

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 European Eltech is:

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

0.43 = ₽558m ÷ (₽3.4b - ₽2.1b) (Based on the trailing twelve months to September 2021).

Thus, European Eltech has an ROCE of 43%. In absolute terms that's a great return and it's even better than the Construction industry average of 9.4%.

Check out our latest analysis for European Eltech

roce
MISX:EELT Return on Capital Employed February 25th 2022

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

What The Trend Of ROCE Can Tell Us

We'd be pretty happy with returns on capital like European Eltech. Over the past four years, ROCE has remained relatively flat at around 43% and the business has deployed 108% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

Another point to note, we noticed the company has increased current liabilities over the last four years. This is intriguing because if current liabilities hadn't increased to 62% of total assets, this reported ROCE would probably be less than43% because total capital employed would be higher.The 43% ROCE could be even lower if current liabilities weren't 62% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

What We Can Learn From European Eltech's ROCE

In short, we'd argue European Eltech has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Yet over the last three years the stock has declined 56%, so the decline might provide an opening. For that reason, savvy investors might want to look further into this company in case it's a prime investment.

If you'd like to know more about European Eltech, we've spotted 4 warning signs, and 1 of them doesn't sit too well with us.

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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