Investors Could Be Concerned With Eurocell's (LON:ECEL) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. However, after briefly looking over the numbers, we don't think Eurocell (LON:ECEL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Eurocell is:

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

0.024 = UK£3.4m ÷ (UK£201m - UK£58m) (Based on the trailing twelve months to December 2020).

Therefore, Eurocell has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Building industry average of 5.9%.

Check out our latest analysis for Eurocell

Above you can see how the current ROCE for Eurocell compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Eurocell here for free.

The Trend Of ROCE

The trend of ROCE doesn't look fantastic because it's fallen from 43% five years ago, while the business's capital employed increased by 153%. That being said, Eurocell raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Eurocell's earnings and if they change as a result from the capital raise.

The Bottom Line On Eurocell's ROCE

In summary, Eurocell is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 61% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

While Eurocell doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

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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