Returns On Capital Signal Tricky Times Ahead For Fleury Michon (EPA:ALFLE)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Fleury Michon (EPA:ALFLE) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Fleury Michon:

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

0.021 = €8.6m ÷ (€641m - €225m) (Based on the trailing twelve months to June 2020).

Therefore, Fleury Michon has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Food industry average of 7.9%.

See our latest analysis for Fleury Michon

In the above chart we have measured Fleury Michon's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Fleury Michon here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Fleury Michon doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.1% from 9.6% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Fleury Michon's ROCE

Bringing it all together, while we're somewhat encouraged by Fleury Michon's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 56% in the last five years. Therefore based on the analysis done in this article, we don't think Fleury Michon has the makings of a multi-bagger.

Fleury Michon does have some risks, we noticed 3 warning signs (and 2 which are a bit concerning) we think you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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