Returns On Capital At Colas (EPA:RE) Have Hit The Brakes

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Although, when we looked at Colas (EPA:RE), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Colas is:

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

0.063 = €284m ÷ (€12b - €7.3b) (Based on the trailing twelve months to June 2022).

Thus, Colas has an ROCE of 6.3%. In absolute terms, that's a low return but it's around the Construction industry average of 7.4%.

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'd like to look at how Colas has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Colas' ROCE Trending?

Over the past five years, Colas' ROCE and capital employed have both remained mostly flat. Businesses with these traits tend to be mature and steady operations because they're past the growth phase. So don't be surprised if Colas doesn't end up being a multi-bagger in a few years time.

Another thing to note, Colas has a high ratio of current liabilities to total assets of 62%. 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 Colas' ROCE

In a nutshell, Colas has been trudging along with the same returns from the same amount of capital over the last five years. And investors appear hesitant that the trends will pick up because the stock has fallen 19% in the last five years. 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.

Colas does have some risks, we noticed 4 warning signs (and 3 which shouldn't be ignored) we think you should know about.

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. 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.