The 40% Return On Capital At European Eltech (MCX:EELT) Got Our Attention

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Speaking of which, we noticed some great changes in European Eltech's (MCX:EELT) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for European Eltech:

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

0.40 = ₽409m ÷ (₽1.8b - ₽807m) (Based on the trailing twelve months to December 2019).

Thus, European Eltech has an ROCE of 40%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.

Check out our latest analysis for European Eltech

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're interested in investigating European Eltech's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For European Eltech Tell Us?

European Eltech is displaying some positive trends. Over the last three years, returns on capital employed have risen substantially to 40%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 125%. So we're very much inspired by what we're seeing at European Eltech thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 44%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line

To sum it up, European Eltech has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 39% in the last three years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 4 warning signs we've spotted with European Eltech (including 2 which make us uncomfortable) .

European Eltech is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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