Eiffage (EPA:FGR) Is Finding It Tricky To Allocate Its Capital

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Eiffage (EPA:FGR) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

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 Eiffage, this is the formula:

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

0.057 = €1.2b ÷ (€34b - €13b) (Based on the trailing twelve months to December 2020).

So, Eiffage has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.9%.

Check out our latest analysis for Eiffage

Above you can see how the current ROCE for Eiffage 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 Eiffage.

So How Is Eiffage's ROCE Trending?

We are a bit worried about the trend of returns on capital at Eiffage. To be more specific, the ROCE was 7.6% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Eiffage to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Eiffage is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 36% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing: We've identified 3 warning signs with Eiffage (at least 1 which is concerning) , and understanding them would certainly be useful.

While Eiffage 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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