Is EPC Groupe (EPA:EXPL) Using Capital Effectively?

February 20, 2021

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at EPC Groupe (EPA:EXPL), we've spotted some signs that it could be struggling, so let's investigate.

What is 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 EPC Groupe:

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

0.0018 = €345k ÷ (€332m - €137m) (Based on the trailing twelve months to June 2020).

Therefore, EPC Groupe has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 8.3%.

Check out our latest analysis for EPC Groupe

Historical performance is a great place to start when researching a stock so above you can see the gauge for EPC Groupe's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of EPC Groupe, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of EPC Groupe's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 3.3% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on EPC Groupe becoming one if things continue as they have.

Another thing to note, EPC Groupe has a high ratio of current liabilities to total assets of 41%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. And long term shareholders have watched their investments stay flat over the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for EPC Groupe (of which 2 are concerning!) 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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