Returns At Cnova (EPA:CNV) Are On The Way Up

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. With that in mind, we've noticed some promising trends at Cnova (EPA:CNV) so let's look a bit deeper.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Cnova:

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

0.16 = €50m ÷ (€1.2b - €901m) (Based on the trailing twelve months to June 2021).

So, Cnova has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Online Retail industry average of 18%.

View our latest analysis for Cnova

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cnova's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Cnova, check out these free graphs here.

So How Is Cnova's ROCE Trending?

Investors would be pleased with what's happening at Cnova. The data shows that returns on capital have increased substantially over the last five years to 16%. The amount of capital employed has increased too, by 651%. So we're very much inspired by what we're seeing at Cnova thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 75%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Cnova has grown its returns without a reliance on increasing their current liabilities, which we're very happy with. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

The Bottom Line

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Cnova has. Considering the stock has delivered 19% 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 exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a final note, we found 2 warning signs for Cnova (1 makes us a bit uncomfortable) you should be aware of.

While Cnova isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.