The Trends At Eumundi Group (ASX:EBG) That You Should Know About

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Eumundi Group (ASX:EBG) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Eumundi Group, this is the formula:

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

0.02 = AU$1.3m ÷ (AU$69m - AU$2.7m) (Based on the trailing twelve months to June 2020).

So, Eumundi Group has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 7.7%.

See our latest analysis for Eumundi Group

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 Eumundi Group, check out these free graphs here.

How Are Returns Trending?

When we looked at the ROCE trend at Eumundi Group, we didn't gain much confidence. Around five years ago the returns on capital were 7.4%, but since then they've fallen to 2.0%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Our Take On Eumundi Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Eumundi Group have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 83% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Eumundi Group does have some risks, we noticed 4 warning signs (and 2 which are a bit concerning) we think you should know about.

While Eumundi Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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