Groupe CIOA (EPA:MLCIO) Has Some Way To Go To Become A Multi-Bagger

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Groupe CIOA (EPA:MLCIO) looks decent, right now, so lets see what the trend of returns can tell us.

What is 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. The formula for this calculation on Groupe CIOA is:

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

0.19 = €1.7m ÷ (€20m - €11m) (Based on the trailing twelve months to December 2019).

So, Groupe CIOA has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 11% it's much better.

See our latest analysis for Groupe CIOA

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Groupe CIOA has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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

While the returns on capital are good, they haven't moved much. The company has employed 115% more capital in the last five years, and the returns on that capital have remained stable at 19%. Since 19% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 55% of total assets, this reported ROCE would probably be less than19% because total capital employed would be higher.The 19% ROCE could be even lower if current liabilities weren't 55% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

What We Can Learn From Groupe CIOA's ROCE

The main thing to remember is that Groupe CIOA has proven its ability to continually reinvest at respectable rates of return. Despite these impressive fundamentals, the stock has collapsed 81% over the last five years, so there is likely other factors affecting the company's future prospects. In any case, we like the underlying trends and would look further into this stock.

Groupe CIOA does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Groupe CIOA 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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