How Has Catering International & Services Société Anonyme (EPA:CTRG) Allocated Its Capital?

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. 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 Catering International & Services Société Anonyme (EPA:CTRG), so let's see why.

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. The formula for this calculation on Catering International & Services Société Anonyme is:

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

0.13 = €11m ÷ (€160m - €79m) (Based on the trailing twelve months to June 2020).

Therefore, Catering International & Services Société Anonyme has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 5.7% generated by the Commercial Services industry.

See our latest analysis for Catering International & Services Société Anonyme

In the above chart we have measured Catering International & Services Société Anonyme's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Catering International & Services Société Anonyme's ROCE Trending?

We are a bit worried about the trend of returns on capital at Catering International & Services Société Anonyme. To be more specific, the ROCE was 20% 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 Catering International & Services Société Anonyme becoming one if things continue as they have.

Another thing to note, Catering International & Services Société Anonyme has a high ratio of current liabilities to total assets of 49%. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Catering International & Services Société Anonyme's ROCE

In summary, it's unfortunate that Catering International & Services Société Anonyme is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 27% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 3 warning signs facing Catering International & Services Société Anonyme that you might find interesting.

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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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