If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Finatis Société Anonyme (EPA:FNTS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is 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. Analysts use this formula to calculate it for Finatis Société Anonyme:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.051 = €1.0b ÷ (€32b - €12b) (Based on the trailing twelve months to June 2020).
Thus, Finatis Société Anonyme has an ROCE of 5.1%. In absolute terms, that's a low return and it also under-performs the Consumer Retailing industry average of 9.3%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Finatis Société Anonyme's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Finatis Société Anonyme, check out these free graphs here.
How Are Returns Trending?
We're a bit concerned with the trends, because the business is applying 28% less capital than it was five years ago and returns on that capital have stayed flat. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. In addition to that, since the ROCE doesn't scream "quality" at 5.1%, it's hard to get excited about these developments.
The Key Takeaway
Overall, we're not ecstatic to see Finatis Société Anonyme reducing the amount of capital it employs in the business. And investors appear hesitant that the trends will pick up because the stock has fallen 53% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
On a separate note, we've found 1 warning sign for Finatis Société Anonyme you'll probably want to know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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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