Returns On Capital At Groupe MEDIA 6 (EPA:EDI) Have Hit The Brakes

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. 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.

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 Groupe MEDIA 6:

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

0.11 = €4.4m ÷ (€68m - €27m) (Based on the trailing twelve months to March 2024).

Thus, Groupe MEDIA 6 has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 13% generated by the Media industry.

Check out our latest analysis for Groupe MEDIA 6

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Groupe MEDIA 6's past further, check out this free graph covering Groupe MEDIA 6's past earnings, revenue and cash flow.

What Does the ROCE Trend For Groupe MEDIA 6 Tell Us?

Over the past five years, Groupe MEDIA 6's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Groupe MEDIA 6 doesn't end up being a multi-bagger in a few years time.

The Key Takeaway

In summary, Groupe MEDIA 6 isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And with the stock having returned a mere 35% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Groupe MEDIA 6 does have some risks though, and we've spotted 2 warning signs for Groupe MEDIA 6 that you might be interested in.

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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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.