Investors Could Be Concerned With Compagnie d'Entreprises CFE's (EBR:CFEB) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Compagnie d'Entreprises CFE (EBR:CFEB), it didn't seem to tick all of these boxes.

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 d'Entreprises CFE, this is the formula:

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).

So, 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 9.9%.

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.

How Are Returns Trending?

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 0.2% from 8.9% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a separate but related note, it's important to know that Compagnie d'Entreprises CFE has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. 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

We're a bit apprehensive about Compagnie d'Entreprises CFE because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 11% 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.

On a final note, we found 3 warning signs for Compagnie d'Entreprises CFE (1 is a bit unpleasant) you should be aware of.

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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