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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Etn. Fr. Colruyt (EBR:COLR), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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)

0.11 = €376m ÷ (€5.6b - €2.3b) (Based on the trailing twelve months to March 2022).

Thus, Etn. Fr. Colruyt has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 12% generated by the Consumer Retailing industry.

Check out the opportunities and risks within the XX Consumer Retailing industry.

Above you can see how the current ROCE for Etn. Fr. Colruyt compares to its prior returns on capital, but there's only so much you can tell from the past. 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?

When we looked at the ROCE trend at Etn. Fr. Colruyt, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 11%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a separate but related note, it's important to know that Etn. Fr. Colruyt has a current liabilities to total assets ratio of 41%, 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take 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. Since the stock has declined 37% over the last five years, investors may not be too optimistic on this trend improving either. 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 come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those shouldn't be ignored...

While Etn. Fr. Colruyt may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.