Compagnie d'Entreprises CFE (EBR:CFEB) Will Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 Compagnie d'Entreprises CFE (EBR:CFEB) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Compagnie d'Entreprises CFE is:

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

0.0019 = €5.7m ÷ (€5.1b - €2.2b) (Based on the trailing twelve months to December 2020).

Thus, Compagnie d'Entreprises CFE has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Construction industry average of 10%.

Check out 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, you can check out the forecasts from the analysts covering Compagnie d'Entreprises CFE here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Compagnie d'Entreprises CFE doesn't inspire confidence. To be more specific, ROCE has fallen from 8.9% over the last five years. 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.

Another thing to note, Compagnie d'Entreprises CFE has a high ratio of current liabilities to total assets of 42%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Compagnie d'Entreprises CFE's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Compagnie d'Entreprises CFE have fallen, meanwhile the business is employing more capital than it was five years ago. Despite the concerning underlying trends, the stock has actually gained 9.4% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Compagnie d'Entreprises CFE does have some risks, we noticed 3 warning signs (and 1 which makes us a bit uncomfortable) we think 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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