Will Christian Dior (EPA:CDI) Multiply In Value Going Forward?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Christian Dior (EPA:CDI), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Christian Dior:

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

0.10 = €7.8b ÷ (€101b - €24b) (Based on the trailing twelve months to June 2020).

So, Christian Dior has an ROCE of 10%. By itself that's a normal return on capital and it's in line with the industry's average returns of 10%.

Check out 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'd like to look at how Christian Dior has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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 13% over the last five years. However it looks like Christian Dior might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Christian Dior's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 223% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

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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