Grolleau Société Anonyme (EPA:ALGRO) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Grolleau Société Anonyme (EPA:ALGRO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Grolleau Société Anonyme, this is the formula:

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

0.031 = €708k ÷ (€31m - €9.0m) (Based on the trailing twelve months to September 2022).

Thus, Grolleau Société Anonyme has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.9%.

See our latest analysis for Grolleau Société Anonyme

In the above chart we have measured Grolleau Société Anonyme's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Grolleau Société Anonyme.

What Does the ROCE Trend For Grolleau Société Anonyme Tell Us?

On the surface, the trend of ROCE at Grolleau Société Anonyme doesn't inspire confidence. Around two years ago the returns on capital were 4.8%, but since then they've fallen to 3.1%. 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. If these investments prove successful, this can bode very well for long term stock performance.

The Bottom Line

While returns have fallen for Grolleau Société Anonyme in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 37% over the last year, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

If you'd like to know more about Grolleau Société Anonyme, we've spotted 4 warning signs, and 2 of them are concerning.

While Grolleau Société Anonyme 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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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.