Stock Analysis

Will Eurocell (LON:ECEL) Multiply In Value Going Forward?

LSE:ECEL
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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. 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.

Understanding Return On Capital Employed (ROCE)

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 Eurocell:

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

0.0047 = UK£700k ÷ (UK£190m - UK£41m) (Based on the trailing twelve months to June 2020).

Therefore, Eurocell has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Building industry average of 5.3%.

Check out our latest analysis for Eurocell

roce
LSE:ECEL Return on Capital Employed December 24th 2020

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 to see what analysts are forecasting going forward, you should check out our free report for Eurocell.

How Are Returns Trending?

We weren't thrilled with the trend because Eurocell's ROCE has reduced by 99% over the last five years, while the business employed 142% more capital. Usually this isn't ideal, but given Eurocell conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. 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.

On a side note, Eurocell has done well to pay down its current liabilities to 22% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

In summary, we're somewhat concerned by Eurocell's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 27% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to continue researching Eurocell, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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