Returns On Capital At CENIT (ETR:CSH) Paint A Concerning Picture

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. Although, when we looked at CENIT (ETR:CSH), it didn't seem to tick all of these boxes.

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. The formula for this calculation on CENIT is:

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

0.093 = €4.7m ÷ (€82m - €32m) (Based on the trailing twelve months to September 2021).

So, CENIT has an ROCE of 9.3%. Ultimately, that's a low return and it under-performs the Software industry average of 13%.

Check out our latest analysis for CENIT

In the above chart we have measured CENIT'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 CENIT here for free.

So How Is CENIT's ROCE Trending?

The trend of ROCE doesn't look fantastic because it's fallen from 26% five years ago, while the business's capital employed increased by 23%. That being said, CENIT raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with CENIT's earnings and if they change as a result from the capital raise.

What We Can Learn From CENIT's ROCE

Bringing it all together, while we're somewhat encouraged by CENIT's reinvestment in its own business, we're aware that returns are shrinking. 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 CENIT has the makings of a multi-bagger.

If you'd like to know about the risks facing CENIT, we've discovered 2 warning signs that you should be aware of.

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.