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

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. In light of that, when we looked at Countryside Properties (LON:CSP) and its ROCE trend, we weren't exactly thrilled.

What is 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 Properties is:

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

0.031 = UK£38m ÷ (UK£1.6b - UK£361m) (Based on the trailing twelve months to September 2020).

Thus, Countryside Properties has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 7.2%.

See our latest analysis for Countryside Properties

In the above chart we have measured Countryside Properties' 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 Properties.

What Does the ROCE Trend For Countryside Properties Tell Us?

Unfortunately, the trend isn't great with ROCE falling from 13% five years ago, while capital employed has grown 112%. That being said, Countryside Properties raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Countryside Properties probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Bottom Line

We're a bit apprehensive about Countryside Properties because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 152% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing, we've spotted 1 warning sign facing Countryside Properties that you might find interesting.

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