Is Elektro Ljubljana d.d (LJSE:ELOG) A Future Multi-bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So on that note, Elektro Ljubljana d.d (LJSE:ELOG) looks quite promising in regards to its trends of return on capital.

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 Elektro Ljubljana d.d:

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

0.037 = €17m ÷ (€500m - €40m) (Based on the trailing twelve months to December 2019).

Thus, Elektro Ljubljana d.d has an ROCE of 3.7%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 6.5%.

View our latest analysis for Elektro Ljubljana d.d

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

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 37% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

On a related note, the company's ratio of current liabilities to total assets has decreased to 8.0%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

The Key Takeaway

To bring it all together, Elektro Ljubljana d.d has done well to increase the returns it's generating from its capital employed. Considering the stock has delivered 8.0% to its stockholders over the last three years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

Elektro Ljubljana d.d does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

While Elektro Ljubljana d.d may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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