Compagnie de l'Odet (EPA:ODET) Is Finding It Tricky To Allocate Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Compagnie de l'Odet (EPA:ODET), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Compagnie de l'Odet:

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

0.02 = €811m ÷ (€52b - €12b) (Based on the trailing twelve months to June 2023).

Therefore, Compagnie de l'Odet has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Logistics industry average of 15%.

View our latest analysis for Compagnie de l'Odet

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

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Compagnie de l'Odet. To be more specific, the ROCE was 2.9% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Compagnie de l'Odet to turn into a multi-bagger.

Our Take On Compagnie de l'Odet's ROCE

In summary, it's unfortunate that Compagnie de l'Odet is generating lower returns from the same amount of capital. However the stock has delivered a 78% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Compagnie de l'Odet does have some risks though, and we've spotted 1 warning sign for Compagnie de l'Odet 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.