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. In light of that, when we looked at Compagnie Du Mont-Blanc (EPA:MLCMB) and its ROCE trend, we weren’t exactly thrilled.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Compagnie Du Mont-Blanc, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.074 = €20m ÷ (€321m – €58m) (Based on the trailing twelve months to May 2019).
So, Compagnie Du Mont-Blanc has an ROCE of 7.4%. In absolute terms, that’s a low return, but it’s much better than the Hospitality industry average of 6.0%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Compagnie Du Mont-Blanc, check out these free graphs here.
What Can We Tell From Compagnie Du Mont-Blanc’s ROCE Trend?
There are better returns on capital out there than what we’re seeing at Compagnie Du Mont-Blanc. Over the past five years, ROCE has remained relatively flat at around 7.4% and the business has deployed 58% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don’t provide a high return on capital.
What We Can Learn From Compagnie Du Mont-Blanc’s ROCE
In summary, Compagnie Du Mont-Blanc has simply been reinvesting capital and generating the same low rate of return as before. Since the stock has gained an impressive 54% over the last five years, investors must think there’s better things to come. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
Since virtually every company faces some risks, it’s worth knowing what they are, and we’ve spotted 4 warning signs for Compagnie Du Mont-Blanc (of which 2 are potentially serious!) that you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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