Countryside Partnerships (LON:CSP) Might Be Having Difficulty Using Its Capital Effectively

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Countryside Partnerships (LON:CSP) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Countryside Partnerships is:

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

0.053 = UK£72m ÷ (UK£1.7b - UK£370m) (Based on the trailing twelve months to September 2021).

Thus, Countryside Partnerships has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 11%.

See our latest analysis for Countryside Partnerships

In the above chart we have measured Countryside Partnerships' prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Countryside Partnerships.

So How Is Countryside Partnerships' ROCE Trending?

When we looked at the ROCE trend at Countryside Partnerships, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.3% from 14% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Countryside Partnerships. These trends are starting to be recognized by investors since the stock has delivered a 29% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Countryside Partnerships does have some risks though, and we've spotted 1 warning sign for Countryside Partnerships that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.