Should You Be Impressed By Countryside Properties' (LON:CSP) Returns on Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Countryside Properties (LON:CSP) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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).

Therefore, Countryside Properties has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 6.7%.

Check out 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'd like, you can check out the forecasts from the analysts covering Countryside Properties here for free.

The Trend Of ROCE

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 Key Takeaway

In summary, we're somewhat concerned by Countryside Properties' diminishing returns on increasing amounts of capital. However the stock has delivered a 38% return to shareholders over the last three years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 2 warning signs for Countryside Properties you'll probably want to know about.

While Countryside Properties 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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This article by Simply Wall St is general in nature. 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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