The Returns At City Service (WSE:CTS) Aren't Growing

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at City Service (WSE:CTS), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on City Service is:

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

0.17 = €6.3m ÷ (€74m - €37m) (Based on the trailing twelve months to June 2023).

So, City Service has an ROCE of 17%. That's a relatively normal return on capital, and it's around the 14% generated by the Commercial Services industry.

View our latest analysis for City Service

Historical performance is a great place to start when researching a stock so above you can see the gauge for City Service's ROCE against it's prior returns. If you're interested in investigating City Service's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From City Service's ROCE Trend?

Over the past five years, City Service's ROCE has remained relatively flat while the business is using 36% less capital than before. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. You could assume that if this continues, the business will be smaller in a few year time, so probably not a multi-bagger.

On a separate but related note, it's important to know that City Service has a current liabilities to total assets ratio of 50%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

It's a shame to see that City Service is effectively shrinking in terms of its capital base. And investors appear hesitant that the trends will pick up because the stock has fallen 44% in the last five years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

City Service does have some risks, we noticed 4 warning signs (and 2 which are significant) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.