Be Wary Of Compagnie Plastic Omnium (EPA:POM) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could 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. Having said that, from a first glance at Compagnie Plastic Omnium (EPA:POM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Compagnie Plastic Omnium is:

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

0.12 = €428m ÷ (€6.3b - €2.7b) (Based on the trailing twelve months to June 2021).

So, Compagnie Plastic Omnium has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Auto Components industry.

See our latest analysis for Compagnie Plastic Omnium

Above you can see how the current ROCE for Compagnie Plastic Omnium compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Compagnie Plastic Omnium.

What Does the ROCE Trend For Compagnie Plastic Omnium Tell Us?

When we looked at the ROCE trend at Compagnie Plastic Omnium, we didn't gain much confidence. To be more specific, ROCE has fallen from 16% over the last five years. 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.

Another thing to note, Compagnie Plastic Omnium has a high ratio of current liabilities to total assets of 43%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Compagnie Plastic Omnium's ROCE

Bringing it all together, while we're somewhat encouraged by Compagnie Plastic Omnium's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing, we've spotted 2 warning signs facing Compagnie Plastic Omnium that you might find interesting.

While Compagnie Plastic Omnium may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.
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