Here's What To Make Of Compagnie Générale des Établissements Michelin Société en commandite par actions' (EPA:ML) Decelerating Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, the ROCE of Compagnie Générale des Établissements Michelin Société en commandite par actions (EPA:ML) looks decent, right now, so lets see what the trend of returns can tell us.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Compagnie Générale des Établissements Michelin Société en commandite par actions:

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

0.11 = €3.0b ÷ (€35b - €8.6b) (Based on the trailing twelve months to June 2022).

Thus, Compagnie Générale des Établissements Michelin Société en commandite par actions has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.0% generated by the Auto Components industry.

Check out our latest analysis for Compagnie Générale des Établissements Michelin Société en commandite par actions

Above you can see how the current ROCE for Compagnie Générale des Établissements Michelin Société en commandite par actions compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Compagnie Générale des Établissements Michelin Société en commandite par actions' ROCE Trending?

While the current returns on capital are decent, they haven't changed much. Over the past five years, ROCE has remained relatively flat at around 11% and the business has deployed 38% more capital into its operations. 11% is a pretty standard return, and it provides some comfort knowing that Compagnie Générale des Établissements Michelin Société en commandite par actions has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

The Bottom Line On Compagnie Générale des Établissements Michelin Société en commandite par actions' ROCE

In the end, Compagnie Générale des Établissements Michelin Société en commandite par actions has proven its ability to adequately reinvest capital at good rates of return. Despite the good fundamentals, total returns from the stock have been virtually flat over the last five years. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

One more thing to note, we've identified 1 warning sign with Compagnie Générale des Établissements Michelin Société en commandite par actions and understanding it should be part of your investment process.

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.