If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 JCDecaux (EPA:DEC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is 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 JCDecaux, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = €192m ÷ (€10b - €3.4b) (Based on the trailing twelve months to June 2022).
Therefore, JCDecaux has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Media industry average of 13%.
See our latest analysis for JCDecaux
In the above chart we have measured JCDecaux's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering JCDecaux here for free.
How Are Returns Trending?
When we looked at the ROCE trend at JCDecaux, we didn't gain much confidence. Around five years ago the returns on capital were 6.8%, but since then they've fallen to 2.8%. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
In Conclusion...
In summary, despite lower returns in the short term, we're encouraged to see that JCDecaux is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 61% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you'd like to know about the risks facing JCDecaux, we've discovered 1 warning sign that you should be aware of.
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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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.
About ENXTPA:DEC
Solid track record and fair value.
