Investors Could Be Concerned With Groupe MEDIA 6's (EPA:EDI) Returns On Capital
What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Groupe MEDIA 6 (EPA:EDI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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 Groupe MEDIA 6, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = €623k ÷ (€79m - €31m) (Based on the trailing twelve months to September 2022).
So, Groupe MEDIA 6 has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Media industry average of 14%.
See our latest analysis for Groupe MEDIA 6
Historical performance is a great place to start when researching a stock so above you can see the gauge for Groupe MEDIA 6's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Groupe MEDIA 6, check out these free graphs here.
What Does the ROCE Trend For Groupe MEDIA 6 Tell Us?
When we looked at the ROCE trend at Groupe MEDIA 6, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.3% from 13% five years ago. 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.
In summary, despite lower returns in the short term, we're encouraged to see that Groupe MEDIA 6 is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 45% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Groupe MEDIA 6 (of which 3 are a bit unpleasant!) that you should know about.
While Groupe MEDIA 6 isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
Valuation is complex, but we're helping make it simple.
Find out whether Groupe MEDIA 6 is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Groupe MEDIA 6
Groupe MEDIA 6, a point-of-purchase (POP) advertising company, provides multi-material solutions in France and internationally.
Mediocre balance sheet with poor track record.