What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Colefax Group (LON:CFX), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Colefax Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = UK£3.0m ÷ (UK£72m - UK£20m) (Based on the trailing twelve months to October 2020).
So, Colefax Group has an ROCE of 5.7%. On its own, that's a low figure but it's around the 6.7% average generated by the Consumer Durables industry.
In the above chart we have measured Colefax Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Colefax Group here for free.
What Does the ROCE Trend For Colefax Group Tell Us?
When we looked at the ROCE trend at Colefax Group, we didn't gain much confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 5.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line On Colefax Group's ROCE
In summary, we're somewhat concerned by Colefax Group's diminishing returns on increasing amounts of capital. In spite of that, the stock has delivered a 4.6% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
One final note, you should learn about the 3 warning signs we've spotted with Colefax Group (including 1 which doesn't sit too well with us) .
While Colefax Group may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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Colefax Group PLC, together with its subsidiaries, engages in the design, marketing, distribution, and retailing of furnishing fabrics, wallpapers, trimmings, upholstered furniture, and related products in the United Kingdom, the United States, rest of Europe, and internationally.
Flawless balance sheet with outstanding track record.