Elektroimportøren (OB: ELIMP) is very good at capital allocation

What trends should we look for if we are to identify stocks that can multiply in value over the long term? A common approach is to try to find a business with Return on capital employed (ROCE) which increases, in connection with growth quantity capital employed. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. With this in mind, the ROCE of Elektroimportøren (OB: ELIMP) looks great, so let’s see what the trend can tell us.

What is Return on Employee Capital (ROCE)?

If you’ve never worked with ROCE before, it measures the “return” (profit before tax) that a business generates on capital employed in its business. Analysts use this formula to calculate it for Elektroimportøren:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.37 = kr136m ÷ (kr644m – kr277m) (Based on the last twelve months up to June 2021).

Therefore, Elektroimportøren has a ROCE of 37%. In absolute terms, this is a great return and is even better than the specialty retail industry average of 13%.

See our latest review for Elektroimportøren

In the graph above, we measured Elektroimportøren’s past ROCE against its past performance, but the future is arguably more important. If you wish, here you can view analyst forecasts covering Elektroimportøren for free.

The ROCE trend

The trends that we have noticed at Elektroimportøren are quite reassuring. Over the past three years, returns on capital employed have increased substantially to 37%. The amount of capital employed also increased by 27%. Increasing returns on an increasing amount of capital are common among multi-baggers and that is why we are impressed.

Another thing to note, Elektroimportøren has a high ratio of current liabilities to total assets of 43%. This can lead to some risks as the business is basically operating with quite a lot of dependence on its suppliers or other types of short term creditors. While this isn’t necessarily a bad thing, it can be beneficial if this ratio is lower.

The key to take away

Overall, it’s great to see Elektroimportøren reaping the rewards of past investments and increasing its capital base. And with a respectable 41% attributed to those who held the shares over the past year, you could argue that these developments are starting to get the attention they deserve. That being said, we still believe that promising fundamentals mean the company deserves additional due diligence.

Elektroimportøren does present some risks, however, and we have spotted 2 warning signs for Elektroimportøren that might interest you.

Elektroimportøren is not the only stock that generates high returns. If you want to see more, check out our free List of companies delivering high returns on equity with strong fundamentals.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.