There's Been No Shortage Of Growth Recently For Colas' (EPA:RE) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Colas (EPA:RE) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.09 = €389m ÷ (€10b - €6.0b) (Based on the trailing twelve months to June 2021).

Therefore, Colas has an ROCE of 9.0%. In absolute terms, that's a low return but it's around the Construction industry average of 7.8%.

See 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

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 9.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 21% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a separate but related note, it's important to know that Colas has a current liabilities to total assets ratio of 58%, which we'd consider pretty high. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Colas' ROCE

To sum it up, Colas has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 0.1% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Colas does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

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.