Returns Are Gaining Momentum At Centrale d'Achat Française pour l'Outre-Mer Société Anonyme (EPA:CAFO)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Speaking of which, we noticed some great changes in Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's (EPA:CAFO) returns on capital, so let's have a look.

What is 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 Centrale d'Achat Française pour l'Outre-Mer Société Anonyme:

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

0.062 = €16m ÷ (€452m - €201m) (Based on the trailing twelve months to September 2020).

So, Centrale d'Achat Française pour l'Outre-Mer Société Anonyme has an ROCE of 6.2%. Even though it's in line with the industry average of 6.4%, it's still a low return by itself.

Check out our latest analysis for Centrale d'Achat Française pour l'Outre-Mer Société Anonyme

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'd like to look at how Centrale d'Achat Française pour l'Outre-Mer Société Anonyme has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 6.2%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 46%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a side note, Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's current liabilities are still rather high at 44% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Centrale d'Achat Française pour l'Outre-Mer Société Anonyme's ROCE

All in all, it's terrific to see that Centrale d'Achat Française pour l'Outre-Mer Société Anonyme is reaping the rewards from prior investments and is growing its capital base. Considering the stock has delivered 25% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

Centrale d'Achat Française pour l'Outre-Mer Société Anonyme does have some risks though, and we've spotted 1 warning sign for Centrale d'Achat Française pour l'Outre-Mer Société Anonyme that you might be interested in.

While Centrale d'Achat Française pour l'Outre-Mer Société Anonyme 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. 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.
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