Returns On Capital Signal Tricky Times Ahead For Etn. Fr. Colruyt (EBR:COLR)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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 Etn. Fr. Colruyt (EBR:COLR), 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 Etn. Fr. Colruyt, this is the formula:

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

0.18 = €527m ÷ (€5.2b - €2.2b) (Based on the trailing twelve months to March 2021).

Therefore, Etn. Fr. Colruyt has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Consumer Retailing industry.

View our latest analysis for Etn. Fr. Colruyt

In the above chart we have measured Etn. Fr. Colruyt'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 Etn. Fr. Colruyt here for free.

The Trend Of ROCE

On the surface, the trend of ROCE at Etn. Fr. Colruyt doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. However it looks like Etn. Fr. Colruyt 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'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 side note, Etn. Fr. Colruyt's current liabilities are still rather high at 42% of total assets. 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 Bottom Line On Etn. Fr. Colruyt's ROCE

To conclude, we've found that Etn. Fr. Colruyt is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 2.1% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

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

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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