Elinoil Hellenic Petroleum (ATH: ELIN) returns on capital do not reflect the activity

If we are to find multi-bagger potential, there are often underlying trends that can provide clues. In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. However, after briefly reviewing the numbers, we don’t think Elinoil Hellenic Petroleum (ATH: ELIN) has the makings of a multi-bagger in the future, but let’s see why it may be.

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. The formula for this calculation on Elinoil Hellenic Petroleum is:

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

0.084 = € 7.0m ÷ (€ 182m – € 99m) (Based on the last twelve months up to December 2020).

Therefore, Elinoil Hellenic Petroleum has a ROCE of 8.4%. In absolute terms, it’s a low return, but it’s far better than the oil and gas industry average of 5.8%.

Check out our latest review for Elinoil Hellenic Petroleum

ATSE: ELIN Return on Capital Employee July 20, 2021

Although the past is not representative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to investigate more about Elinoil Hellenic Petroleum’s past, check out this free graph of past income, income and cash flow.

The ROCE trend

When we looked at the ROCE trend at Elinoil Hellenic Petroleum, we didn’t gain much confidence. To be more precise, ROCE has increased from 14% over the past five years. Considering the company is employing more capital while revenues have declined, this is a bit of a concern. If this were to continue, you might consider a business that is trying to reinvest for growth, but is actually losing market share since sales haven’t increased.

Elinoil Hellenic Petroleum’s short-term liabilities are also still quite high at 55% of total assets. This can lead to some risks as the business is essentially operating with quite a lot of dependence on its suppliers or other types of short-term creditors. Ideally, we would like this to decrease as that would mean less risky bonds.

The key to take away

In summary, we are somewhat concerned about the diminishing returns of Elinoil Hellenic Petroleum on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a whopping 129% over the past five years, so investors are looking very bullish. Either way, we don’t feel very comfortable with the fundamentals so we’re avoiding this title for now.

If you want to know some of the risks that Elinoil Hellenic Petroleum faces, we have found 4 warning signs (2 make us uncomfortable!) Which you should be aware of before investing here.

Although Elinoil Hellenic Petroleum does not generate the highest yield, check out this free list of companies that generate high returns on equity with strong balance sheets.

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