Exacompta Clairefontaine (EPA:EXAC) Will Be Hoping To Turn Its Returns On Capital Around

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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 briefly looking over the numbers, we don't think Exacompta Clairefontaine (EPA:EXAC) 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 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 Exacompta Clairefontaine:

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

0.022 = €15m ÷ (€894m - €240m) (Based on the trailing twelve months to December 2020).

So, Exacompta Clairefontaine has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Forestry industry average of 6.4%.

Check out our latest analysis for Exacompta Clairefontaine

Historical performance is a great place to start when researching a stock so above you can see the gauge for Exacompta Clairefontaine's ROCE against it's prior returns. If you're interested in investigating Exacompta Clairefontaine's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Exacompta Clairefontaine, we didn't gain much confidence. To be more specific, ROCE has fallen from 3.4% over the last five years. However it looks like Exacompta Clairefontaine might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Bottom Line

Bringing it all together, while we're somewhat encouraged by Exacompta Clairefontaine's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 49% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a separate note, we've found 2 warning signs for Exacompta Clairefontaine you'll probably want to 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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