Should You Be Impressed By Etn. Fr. Colruyt's (EBR:COLR) Returns on Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Etn. Fr. Colruyt (EBR:COLR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. The formula for this calculation on Etn. Fr. Colruyt is:

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

0.18 = €500m ÷ (€4.6b - €1.9b) (Based on the trailing twelve months to March 2020).

So, Etn. Fr. Colruyt has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 9.3% it's much better.

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.

So How Is Etn. Fr. Colruyt's ROCE Trending?

On the surface, the trend of ROCE at Etn. Fr. Colruyt doesn't inspire confidence. Over the last five years, returns on capital have decreased to 18% from 25% five years ago. 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 side note, Etn. Fr. Colruyt's current liabilities are still rather high at 41% of total assets. 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.

In Conclusion...

To conclude, we've found that Etn. Fr. Colruyt is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 18% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing, we've spotted 1 warning sign facing Etn. Fr. Colruyt that you might find interesting.

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. 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.
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