There are a few key trends to look for if we want to identify the next multi-bagger. 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Compagnie de l'Odet (EPA:ODET) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. The formula for this calculation on Compagnie de l'Odet is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.047 = €1.9b ÷ (€58b - €17b) (Based on the trailing twelve months to June 2021).
Therefore, Compagnie de l'Odet has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Logistics industry average of 14%.
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 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.
So How Is Compagnie de l'Odet's ROCE Trending?
The returns on capital haven't changed much for Compagnie de l'Odet in recent years. Over the past five years, ROCE has remained relatively flat at around 4.7% and the business has deployed 227% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line
In conclusion, Compagnie de l'Odet has been investing more capital into the business, but returns on that capital haven't increased. Since the stock has gained an impressive 74% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Like most companies, Compagnie de l'Odet does come with some risks, and we've found 1 warning sign that you should be aware of.
While Compagnie de l'Odet 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.