Should We Be Excited About The Trends Of Returns At Corticeira Amorim S.G.P.S (ELI:COR)?

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Corticeira Amorim S.G.P.S (ELI:COR), it didn't seem to tick all of these boxes.

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

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. To calculate this metric for Corticeira Amorim S.G.P.S, this is the formula:

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

0.12 = €86m ÷ (€757m - €43m) (Based on the trailing twelve months to September 2020).

Therefore, Corticeira Amorim S.G.P.S has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.

Check out our latest analysis for Corticeira Amorim S.G.P.S

In the above chart we have measured Corticeira Amorim S.G.P.S' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Corticeira Amorim S.G.P.S here for free.

The Trend Of ROCE

When we looked at the ROCE trend at Corticeira Amorim S.G.P.S, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 12%. However it looks like Corticeira Amorim S.G.P.S 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Corticeira Amorim S.G.P.S has decreased its current liabilities to 5.7% of total assets. That could partly explain why the ROCE has dropped. 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.

The Bottom Line

To conclude, we've found that Corticeira Amorim S.G.P.S is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 119% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching Corticeira Amorim S.G.P.S, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Corticeira Amorim S.G.P.S 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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