The Returns At Compa (BVB:CMP) Provide Us With Signs Of What's To Come

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Compa (BVB:CMP) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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 Compa, this is the formula:

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

0.03 = RON18m ÷ (RON734m - RON130m) (Based on the trailing twelve months to December 2020).

Therefore, Compa has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.3%.

Check out our latest analysis for Compa

Historical performance is a great place to start when researching a stock so above you can see the gauge for Compa's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Compa, check out these free graphs here.

What Does the ROCE Trend For Compa Tell Us?

When we looked at the ROCE trend at Compa, we didn't gain much confidence. Around five years ago the returns on capital were 7.3%, but since then they've fallen to 3.0%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Compa's ROCE

We're a bit apprehensive about Compa because despite more capital being deployed in the business, returns on that capital and sales have both fallen. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Compa (of which 1 can't be ignored!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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