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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at JCDecaux (EPA:DEC) and its ROCE trend, we weren't exactly thrilled.
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 JCDecaux, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = €204m ÷ (€10b - €3.2b) (Based on the trailing twelve months to December 2022).
Thus, JCDecaux has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Media industry average of 12%.
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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
SWOT Analysis for JCDecaux
- Debt is well covered by cash flow.
- Interest payments on debt are not well covered.
- Expensive based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow faster than the French market.
- Revenue is forecast to grow slower than 20% per year.
What Does the ROCE Trend For JCDecaux Tell Us?
When we looked at the ROCE trend at JCDecaux, we didn't gain much confidence. To be more specific, ROCE has fallen from 6.8% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line
While returns have fallen for JCDecaux 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 29% over the last five years, 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.
JCDecaux does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
While JCDecaux 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. 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.
