The Returns On Capital At Passat Société Anonyme (EPA:PSAT) Don't Inspire Confidence

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 Passat Société Anonyme (EPA:PSAT) and its ROCE trend, we weren't exactly thrilled.

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 Passat Société Anonyme:

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

0.038 = €1.7m ÷ (€58m - €14m) (Based on the trailing twelve months to December 2022).

Thus, Passat Société Anonyme has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Multiline Retail industry average of 8.5%.

See our latest analysis for Passat Société Anonyme

Historical performance is a great place to start when researching a stock so above you can see the gauge for Passat Société Anonyme's ROCE against it's prior returns. If you'd like to look at how Passat Société Anonyme has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Passat Société Anonyme Tell Us?

On the surface, the trend of ROCE at Passat Société Anonyme doesn't inspire confidence. To be more specific, ROCE has fallen from 7.4% over the last five years. However it looks like Passat Société Anonyme might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

To conclude, we've found that Passat Société Anonyme is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 16% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

On a separate note, we've found 2 warning signs for Passat Société Anonyme you'll probably want to know about.

While Passat 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. 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.