The Trend Of High Returns At EQL Pharma (NGM:EQL) Has Us Very Interested

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of EQL Pharma (NGM:EQL) we really liked what we saw.

What Is 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 EQL Pharma:

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

0.24 = kr41m ÷ (kr286m - kr117m) (Based on the trailing twelve months to March 2023).

Therefore, EQL Pharma has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Healthcare industry average of 5.9%.

See our latest analysis for EQL Pharma

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

What The Trend Of ROCE Can Tell Us

EQL Pharma has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 24% which is a sight for sore eyes. In addition to that, EQL Pharma is employing 198% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 41% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

Long story short, we're delighted to see that EQL Pharma's reinvestment activities have paid off and the company is now profitable. And a remarkable 271% total return over the last five years tells us that investors are expecting more good things to come in the future. 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, we've spotted 1 warning sign facing EQL Pharma that you might find interesting.

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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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.