How Well Is Colas (EPA:RE) Allocating Its Capital?

What financial metrics can indicate to us that a company is maturing or even in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Colas (EPA:RE), so let's see why.

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. To calculate this metric for Colas, this is the formula:

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

0.043 = €193m ÷ (€10b - €5.7b) (Based on the trailing twelve months to June 2020).

So, Colas has an ROCE of 4.3%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.0%.

View our latest analysis for Colas

Historical performance is a great place to start when researching a stock so above you can see the gauge for Colas' ROCE against it's prior returns. If you're interested in investigating Colas' past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Colas' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.3% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Colas becoming one if things continue as they have.

On a side note, Colas' current liabilities are still rather high at 56% of total assets. 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.

The Bottom Line On Colas' ROCE

In summary, it's unfortunate that Colas is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 7.2% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing Colas we've found 4 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Colas isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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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