Malteries Franco-Belges Société Anonyme (EPA:MALT) May Have Issues Allocating Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after investigating Malteries Franco-Belges Société Anonyme (EPA:MALT), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. To calculate this metric for Malteries Franco-Belges Société Anonyme, this is the formula:

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

0.011 = €2.4m ÷ (€251m - €37m) (Based on the trailing twelve months to December 2020).

Therefore, Malteries Franco-Belges Société Anonyme has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Food industry average of 7.8%.

View our latest analysis for Malteries Franco-Belges Société Anonyme

Historical performance is a great place to start when researching a stock so above you can see the gauge for Malteries Franco-Belges Société Anonyme's ROCE against it's prior returns. If you'd like to look at how Malteries Franco-Belges Société Anonyme has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Malteries Franco-Belges Société Anonyme's ROCE Trending?

On the surface, the trend of ROCE at Malteries Franco-Belges Société Anonyme doesn't inspire confidence. Around five years ago the returns on capital were 5.3%, but since then they've fallen to 1.1%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Malteries Franco-Belges Société Anonyme's ROCE

In summary, we're somewhat concerned by Malteries Franco-Belges Société Anonyme's diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 287% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Malteries Franco-Belges Société Anonyme (of which 1 is significant!) that you should 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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