Will the Promising Trends At EQL Pharma (NGM:EQL) Continue?

If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Speaking of which, we noticed some great changes in EQL Pharma's (NGM:EQL) returns on capital, so let's have a look.

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

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. To calculate this metric for EQL Pharma, this is the formula:

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

0.19 = kr18m ÷ (kr140m - kr44m) (Based on the trailing twelve months to September 2020).

So, EQL Pharma has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Healthcare industry average of 6.6% it's much better.

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'd like to look at how EQL Pharma has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is EQL Pharma's ROCE Trending?

Investors would be pleased with what's happening at EQL Pharma. The data shows that returns on capital have increased substantially over the last five years to 19%. The amount of capital employed has increased too, by 377%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Key Takeaway

All in all, it's terrific to see that EQL Pharma is reaping the rewards from prior investments and is growing its capital base. And a remarkable 612% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if EQL Pharma can keep these trends up, it could have a bright future ahead.

On a final note, we found 3 warning signs for EQL Pharma (1 is significant) you should be aware of.

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This article by Simply Wall St is general in nature. 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.
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