We're Watching These Trends At Exacompta Clairefontaine (EPA:EXAC)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 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)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.02 = €13m ÷ (€855m - €198m) (Based on the trailing twelve months to June 2020).

Therefore, Exacompta Clairefontaine has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 5.7%.

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.

So How Is Exacompta Clairefontaine's ROCE Trending?

In terms of Exacompta Clairefontaine's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.0%, but since then they've fallen to 2.0%. 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.

Our Take On Exacompta Clairefontaine's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Exacompta Clairefontaine. Furthermore the stock has climbed 66% over the last five years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Exacompta Clairefontaine we've found 3 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Exacompta Clairefontaine may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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