Returns On Capital Are Showing Encouraging Signs At Evrofarma (ATH:EVROF)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. With that in mind, we've noticed some promising trends at Evrofarma (ATH:EVROF) so let's look a bit deeper.

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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. Analysts use this formula to calculate it for Evrofarma:

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

0.10 = €3.7m ÷ (€50m - €14m) (Based on the trailing twelve months to June 2024).

Thus, Evrofarma has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 10%.

Check out our latest analysis for Evrofarma

Historical performance is a great place to start when researching a stock so above you can see the gauge for Evrofarma's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Evrofarma.

What Does the ROCE Trend For Evrofarma Tell Us?

Investors would be pleased with what's happening at Evrofarma. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 10%. The amount of capital employed has increased too, by 27%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 28%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Evrofarma has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

All in all, it's terrific to see that Evrofarma is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 324% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

One final note, you should learn about the 4 warning signs we've spotted with Evrofarma (including 2 which are significant) .

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.