Is Columbus (CPH:COLUM) Likely To Turn Things Around?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Columbus (CPH:COLUM) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Columbus:

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

0.062 = kr.60m ÷ (kr.1.6b - kr.606m) (Based on the trailing twelve months to September 2020).

Thus, Columbus has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the IT industry average of 12%.

View our latest analysis for Columbus

Historical performance is a great place to start when researching a stock so above you can see the gauge for Columbus' ROCE against it's prior returns. If you're interested in investigating Columbus' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Columbus' ROCE Trend?

On the surface, the trend of ROCE at Columbus doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.2% from 14% five years ago. 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

In summary, Columbus is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Since the stock has gained an impressive 69% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Columbus (of which 1 is concerning!) that you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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