Returns On Capital Are Showing Encouraging Signs At Pharmacy Chain 36.6 (MCX:APTK)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Pharmacy Chain 36.6's (MCX:APTK) returns on capital, so let's have a look.

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. Analysts use this formula to calculate it for Pharmacy Chain 36.6:

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

0.076 = ₽1.5b ÷ (₽34b - ₽15b) (Based on the trailing twelve months to June 2021).

So, Pharmacy Chain 36.6 has an ROCE of 7.6%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 11%.

Check out our latest analysis for Pharmacy Chain 36.6

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, revenue and cash flow of Pharmacy Chain 36.6, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

Pharmacy Chain 36.6 has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 7.6% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Pharmacy Chain 36.6 has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

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. This tells us that Pharmacy Chain 36.6 has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On Pharmacy Chain 36.6's ROCE

To sum it up, Pharmacy Chain 36.6 is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 39% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing to note, we've identified 1 warning sign with Pharmacy Chain 36.6 and understanding this 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.