Omer-Decugis & Cie (EPA:ALODC) Could Be Struggling To Allocate Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. However, after investigating Omer-Decugis & Cie (EPA:ALODC), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Omer-Decugis & Cie:

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

0.062 = €2.2m ÷ (€67m - €30m) (Based on the trailing twelve months to March 2022).

Thus, Omer-Decugis & Cie has an ROCE of 6.2%. Even though it's in line with the industry average of 6.0%, it's still a low return by itself.

See our latest analysis for Omer-Decugis & Cie

Above you can see how the current ROCE for Omer-Decugis & Cie compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Omer-Decugis & Cie here for free.

So How Is Omer-Decugis & Cie's ROCE Trending?

On the surface, the trend of ROCE at Omer-Decugis & Cie doesn't inspire confidence. Around four years ago the returns on capital were 11%, but since then they've fallen to 6.2%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Omer-Decugis & Cie's current liabilities are still rather high at 46% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Omer-Decugis & Cie is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 40% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One final note, you should learn about the 4 warning signs we've spotted with Omer-Decugis & Cie (including 2 which don't sit too well with us) .

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.