Capital Allocation Trends At Christian Dior (EPA:CDI) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Christian Dior (EPA:CDI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Christian Dior, this is the formula:

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

0.10 = €8.3b ÷ (€106b - €26b) (Based on the trailing twelve months to December 2020).

Therefore, Christian Dior has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Luxury industry average of 11%.

See our latest analysis for Christian Dior

Historical performance is a great place to start when researching a stock so above you can see the gauge for Christian Dior's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Christian Dior, check out these free graphs here.

How Are Returns Trending?

On the surface, the trend of ROCE at Christian Dior doesn't inspire confidence. To be more specific, ROCE has fallen from 14% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

In Conclusion...

In summary, we're somewhat concerned by Christian Dior's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 442% over the last five years, so investors appear very optimistic. 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 Christian Dior you'll probably want to know about.

While Christian Dior 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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