What Do The Returns On Capital At Econocom Group (EBR:ECONB) Tell Us?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Econocom Group (EBR:ECONB), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Econocom Group is:

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

0.099 = €118m ÷ (€2.7b - €1.5b) (Based on the trailing twelve months to June 2020).

So, Econocom Group has an ROCE of 9.9%. In absolute terms, that's a low return and it also under-performs the IT industry average of 13%.

Check out our latest analysis for Econocom Group

In the above chart we have measured Econocom Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

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

When we looked at the ROCE trend at Econocom Group, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 9.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Econocom Group's current liabilities are still rather high at 55% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Econocom Group's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Econocom Group have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 57% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we found 4 warning signs for Econocom Group (1 is a bit concerning) you should be aware of.

While Econocom Group 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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