Returns On Capital At Jerónimo Martins SGPS (ELI:JMT) Paint A Concerning Picture

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. However, after briefly looking over the numbers, we don't think Jerónimo Martins SGPS (ELI:JMT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Jerónimo Martins SGPS:

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

0.14 = €689m ÷ (€8.9b - €4.0b) (Based on the trailing twelve months to December 2020).

Therefore, Jerónimo Martins SGPS has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 8.6% it's much better.

Check out our latest analysis for Jerónimo Martins SGPS

In the above chart we have measured Jerónimo Martins SGPS' 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 Jerónimo Martins SGPS.

So How Is Jerónimo Martins SGPS' ROCE Trending?

When we looked at the ROCE trend at Jerónimo Martins SGPS, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 14%. However it looks like Jerónimo Martins SGPS might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Jerónimo Martins SGPS has decreased its current liabilities to 45% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 45% is still pretty high, so those risks are still somewhat prevalent.

What We Can Learn From Jerónimo Martins SGPS' ROCE

In summary, Jerónimo Martins SGPS is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 7.5% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Jerónimo Martins SGPS that you might find interesting.

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