Slowing Rates Of Return At Construcciones y Auxiliar de Ferrocarriles (BME:CAF) Leave Little Room For Excitement

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Construcciones y Auxiliar de Ferrocarriles (BME:CAF) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Construcciones y Auxiliar de Ferrocarriles is:

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

0.091 = €169m ÷ (€5.0b - €3.2b) (Based on the trailing twelve months to September 2023).

So, Construcciones y Auxiliar de Ferrocarriles has an ROCE of 9.1%. In absolute terms, that's a low return but it's around the Machinery industry average of 11%.

Check out our latest analysis for Construcciones y Auxiliar de Ferrocarriles

Above you can see how the current ROCE for Construcciones y Auxiliar de Ferrocarriles 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 Construcciones y Auxiliar de Ferrocarriles for free.

So How Is Construcciones y Auxiliar de Ferrocarriles' ROCE Trending?

There hasn't been much to report for Construcciones y Auxiliar de Ferrocarriles' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Construcciones y Auxiliar de Ferrocarriles to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that Construcciones y Auxiliar de Ferrocarriles has been paying out a decent 44% of its earnings to shareholders. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 63% of total assets, this reported ROCE would probably be less than9.1% because total capital employed would be higher.The 9.1% ROCE could be even lower if current liabilities weren't 63% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

The Key Takeaway

In summary, Construcciones y Auxiliar de Ferrocarriles isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Since the stock has declined 12% over the last five years, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 2 warning signs for Construcciones y Auxiliar de Ferrocarriles (1 doesn't sit too well with us) you should be aware of.

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. 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.