What trends should we look for it we want to identify stocks that can 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. Although, when we looked at Chimimport AD (BUL:6C4), 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. To calculate this metric for Chimimport AD, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0069 = лв66m ÷ (лв10b - лв541m) (Based on the trailing twelve months to September 2020).
Therefore, Chimimport AD has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Industrials industry average of 5.3%.
See our latest analysis for Chimimport AD
Historical performance is a great place to start when researching a stock so above you can see the gauge for Chimimport AD's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Chimimport AD, check out these free graphs here.
The Trend Of ROCE
When we looked at the ROCE trend at Chimimport AD, we didn't gain much confidence. Around five years ago the returns on capital were 2.1%, but since then they've fallen to 0.7%. And considering revenue has dropped while employing more capital, we'd be cautious. 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 related note, Chimimport AD has decreased its current liabilities to 5.3% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Bottom Line On Chimimport AD's ROCE
We're a bit apprehensive about Chimimport AD because despite more capital being deployed in the business, returns on that capital and sales have both fallen. It should come as no surprise then that the stock has fallen 12% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Chimimport AD could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
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. 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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About BUL:CHIM
Chimimport AD
Engages in the acquisition, management, and sale of shares in Bulgarian and foreign companies.
Solid track record with excellent balance sheet.
