Our Take On The Returns On Capital At Compagnie d'Entreprises CFE (EBR:CFEB)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 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)

0.0099 = €30m ÷ (€5.4b - €2.3b) (Based on the trailing twelve months to June 2020).

Therefore, Compagnie d'Entreprises CFE has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Construction industry average of 10%.

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Compagnie d'Entreprises CFE doesn't inspire confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 1.0%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

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 43%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Key Takeaway

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 1.5% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Like most companies, Compagnie d'Entreprises CFE does come with some risks, and we've found 4 warning signs that 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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