Be Wary Of Countryside Properties (LON:CSP) And Its Returns On Capital

What are the early trends we should look for to identify a stock that could 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Countryside Properties (LON:CSP), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Countryside Properties is:

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

0.019 = UK£25m ÷ (UK£1.7b - UK£354m) (Based on the trailing twelve months to March 2021).

So, Countryside Properties has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 6.2%.

View our latest analysis for Countryside Properties

Above you can see how the current ROCE for Countryside Properties compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Countryside Properties' ROCE Trending?

We weren't thrilled with the trend because Countryside Properties' ROCE has reduced by 87% over the last five years, while the business employed 116% more capital. Usually this isn't ideal, but given Countryside Properties 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 Countryside Properties' earnings and if they change as a result from the capital raise.

The Key Takeaway

In summary, we're somewhat concerned by Countryside Properties' diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 160% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Countryside Properties could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Countryside Properties 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.
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