Compagnie Plastic Omnium (EPA:POM) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. 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.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Compagnie Plastic Omnium, this is the formula:

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

0.071 = €253m ÷ (€6.3b - €2.8b) (Based on the trailing twelve months to December 2021).

Therefore, Compagnie Plastic Omnium has an ROCE of 7.1%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 11%.

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, you can check out the forecasts from the analysts covering Compagnie Plastic Omnium here for free.

What Can We Tell From Compagnie Plastic Omnium's ROCE Trend?

When we looked at the ROCE trend at Compagnie Plastic Omnium, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.1% from 17% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Compagnie Plastic Omnium's current liabilities are still rather high at 44% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Compagnie Plastic Omnium's ROCE

To conclude, we've found that Compagnie Plastic Omnium is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 49% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

Like most companies, Compagnie Plastic Omnium does come with some risks, and we've found 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.