Investors Could Be Concerned With Groupe Pizzorno Environnement's (EPA:GPE) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Groupe Pizzorno Environnement (EPA:GPE), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

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 Pizzorno Environnement:

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

0.012 = €2.1m ÷ (€283m - €108m) (Based on the trailing twelve months to June 2020).

Therefore, Groupe Pizzorno Environnement has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 5.2%.

Check out our latest analysis for Groupe Pizzorno Environnement

Above you can see how the current ROCE for Groupe Pizzorno Environnement compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Groupe Pizzorno Environnement here for free.

What Can We Tell From Groupe Pizzorno Environnement's ROCE Trend?

We are a bit worried about the trend of returns on capital at Groupe Pizzorno Environnement. Unfortunately the returns on capital have diminished from the 5.9% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Groupe Pizzorno Environnement becoming one if things continue as they have.

What We Can Learn From Groupe Pizzorno Environnement's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. However the stock has delivered a 53% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 2 warning signs for Groupe Pizzorno Environnement you'll probably want to know about.

While Groupe Pizzorno Environnement 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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