If we want to find a potential multi-bagger, there are often underlying trends that can provide clues. First, we would like to identify a growth to return to on capital employed (ROCE) and at the same time, a based capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. That said, at a first glance at Chargers (EPA:CRI) we’re not jumping off our chairs on the yield trend, but taking a closer look.
Understanding return on capital employed (ROCE)
For those unaware, ROCE is a measure of a company’s annual pre-tax profit (yield), relative to the capital employed in the business. Analysts use this formula to calculate it for Chargers:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.064 = €41m ÷ (€932m – €291m) (Based on the last twelve months to December 2021).
So, Chargeurs posted a ROCE of 6.4%. In absolute terms, this is a low return, but it is around the industry average of 7.7%.
Check out our latest review for Chargers
In the chart above, we’ve measured Chargeurs’ past ROCE against its past performance, but the future is arguably more important. If you want to see what analysts predict for the future, you should check out our free report for Chargers.
What is the return trend?
When we looked at the ROCE trend at Chargeurs, we didn’t gain much confidence. To be more specific, ROCE has fallen by 10% over the past five years. Given that the company is employing more capital as revenues have fallen, this is a bit of a concern. If this were to continue, you might be dealing with a company trying to reinvest in growth, but actually losing market share since sales haven’t increased.
What we can learn from Chargeurs’ ROCE
Based on the analysis above, we find it rather worrying that the returns on capital and sales of Chargeurs have fallen, while the business employs more capital than five years ago. Investors should expect better things on the horizon, however, as the stock is up 13% over the past five years. Either way, we don’t like the trends as they are and if they persist, we think you might find better investments elsewhere.
Since virtually every business faces risks, it’s worth knowing about them, and we’ve spotted 4 warning signs for Chargers (1 of which makes us a little uncomfortable!) that you should know.
If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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