There Are Reasons To Feel Uneasy About Colruyt Group's (EBR:COLR) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Colruyt Group (EBR:COLR), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Colruyt Group, this is the formula:

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

0.099 = €421m ÷ (€6.7b - €2.4b) (Based on the trailing twelve months to September 2023).

Thus, Colruyt Group has an ROCE of 9.9%. On its own, that's a low figure but it's around the 11% average generated by the Consumer Retailing industry.

Check out our latest analysis for Colruyt Group

Above you can see how the current ROCE for Colruyt Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Colruyt Group .

What Can We Tell From Colruyt Group's ROCE Trend?

On the surface, the trend of ROCE at Colruyt Group doesn't inspire confidence. Over the last five years, returns on capital have decreased to 9.9% from 23% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Colruyt Group is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 28% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you want to continue researching Colruyt Group, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.