Some Investors May Be Worried About Etn. Fr. Colruyt's (EBR:COLR) 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. 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)

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 Etn. Fr. Colruyt, this is the formula:

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

0.092 = €290m ÷ (€6.0b - €2.9b) (Based on the trailing twelve months to September 2022).

Therefore, Etn. Fr. Colruyt has an ROCE of 9.2%. On its own, that's a low figure but it's around the 9.9% average generated by the Consumer Retailing industry.

Check out 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 to see what analysts are forecasting going forward, you should check out our free report for Etn. Fr. Colruyt.

SWOT Analysis for Etn. Fr. Colruyt

How Are Returns Trending?

When we looked at the ROCE trend at Etn. Fr. Colruyt, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.2% from 19% five years ago. 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 may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, Etn. Fr. Colruyt has a high ratio of current liabilities to total assets of 48%. 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.

What We Can Learn From 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 in the last five years, the stock has given away 26% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Etn. Fr. Colruyt has the makings of a multi-bagger.

Etn. Fr. Colruyt does have some risks though, and we've spotted 4 warning signs for Etn. Fr. Colruyt that you might be interested in.

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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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.