Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 on that note, elumeo (ETR:ELB) looks quite promising in regards to its trends of return on capital.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on elumeo is:

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

0.0034 = €54k ÷ (€24m - €8.8m) (Based on the trailing twelve months to September 2022).

Thus, elumeo has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Luxury industry average of 10%.

View our latest analysis for elumeo

In the above chart we have measured elumeo's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for elumeo.

What Does the ROCE Trend For elumeo Tell Us?

We're delighted to see that elumeo is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 0.3% which is no doubt a relief for some early shareholders. In regards to capital employed, elumeo is using 59% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

The Key Takeaway

In summary, it's great to see that elumeo has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 68% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

elumeo does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.

While elumeo 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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