Has Groupe CRIT (EPA:CEN) Got What It Takes To Become A Multi-Bagger?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Groupe CRIT (EPA:CEN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for Groupe CRIT:

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

0.094 = €69m ÷ (€1.2b - €430m) (Based on the trailing twelve months to June 2020).

Therefore, Groupe CRIT has an ROCE of 9.4%. On its own, that's a low figure but it's around the 10% average generated by the Professional Services industry.

Check out our latest analysis for Groupe CRIT

In the above chart we have measured Groupe CRIT's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Groupe CRIT here for free.

What Can We Tell From Groupe CRIT's ROCE Trend?

On the surface, the trend of ROCE at Groupe CRIT doesn't inspire confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 9.4%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Groupe CRIT has done well to pay down its current liabilities to 37% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Groupe CRIT's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Groupe CRIT have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 46% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 1 warning sign for Groupe CRIT that we think you should be aware of.

While Groupe CRIT 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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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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