Compagnie d'Entreprises CFE (EBR:CFEB) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Compagnie d'Entreprises CFE (EBR:CFEB), it didn't seem to tick all of these boxes.

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. To calculate this metric for Compagnie d'Entreprises CFE, this is the formula:

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

0.04 = €117m ÷ (€5.0b - €2.1b) (Based on the trailing twelve months to June 2021).

Therefore, Compagnie d'Entreprises CFE has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.2%.

See our latest analysis for Compagnie d'Entreprises CFE

In the above chart we have measured Compagnie d'Entreprises CFE'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 Compagnie d'Entreprises CFE.

What Does the ROCE Trend For Compagnie d'Entreprises CFE Tell Us?

On the surface, the trend of ROCE at Compagnie d'Entreprises CFE doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.0% from 6.7% five years ago. However it looks like Compagnie d'Entreprises CFE might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Compagnie d'Entreprises CFE has a high ratio of current liabilities to total assets of 41%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Compagnie d'Entreprises CFE's ROCE

In summary, Compagnie d'Entreprises CFE is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 6.5% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you're still interested in Compagnie d'Entreprises CFE it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.