Returns On Capital Signal Difficult Times Ahead For Compagnie de l'Odet (EPA:ODET)

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Compagnie de l'Odet (EPA:ODET), the trends above didn't look too great.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Compagnie de l'Odet, this is the formula:

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

0.01 = €479m ÷ (€61b - €15b) (Based on the trailing twelve months to June 2024).

Therefore, Compagnie de l'Odet has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Logistics industry average of 11%.

See 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're interested in investigating Compagnie de l'Odet's past further, check out this free graph covering Compagnie de l'Odet's past earnings, revenue and cash flow.

The Trend Of ROCE

There is reason to be cautious about Compagnie de l'Odet, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 3.6% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Compagnie de l'Odet becoming one if things continue as they have.

The Bottom Line On Compagnie de l'Odet's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these poor fundamentals, the stock has gained a huge 132% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing to note, we've identified 1 warning sign with Compagnie de l'Odet and understanding it should be part of your investment process.

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.