What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Although, when we looked at Convergenze. Società Benefit (BIT:CVG), it didn't seem to tick all of these boxes.
Return On Capital Employed (ROCE): What is it?
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. To calculate this metric for Convergenze. Società Benefit, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = €803k ÷ (€14m - €4.8m) (Based on the trailing twelve months to June 2021).
So, Convergenze. Società Benefit has an ROCE of 8.4%. On its own that's a low return, but compared to the average of 4.3% generated by the Telecom industry, it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Convergenze. Società Benefit's ROCE against it's prior returns. If you're interested in investigating Convergenze. Società Benefit's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Convergenze. Società Benefit's ROCE Trend?
In terms of Convergenze. Società Benefit's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 20% over the last three years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Convergenze. Società Benefit has done well to pay down its current liabilities to 33% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
Bringing it all together, while we're somewhat encouraged by Convergenze. Società Benefit's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 14% over the last year, investors may not be too optimistic on this trend improving either. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Convergenze. Società Benefit (of which 1 is significant!) that you should know about.
While Convergenze. Società Benefit 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. 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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