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Eumundi Group (ASX:EBG) Will Want To Turn Around Its Return Trends

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·2-min read
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To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Eumundi Group (ASX:EBG), we don't think it's current trends fit the mold of a multi-bagger.

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 Eumundi Group, this is the formula:

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

0.023 = AU$1.6m ÷ (AU$75m - AU$4.9m) (Based on the trailing twelve months to December 2020).

Thus, Eumundi Group has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 9.1%.

View our latest analysis for Eumundi Group


While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Eumundi Group's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Eumundi Group's ROCE Trending?

On the surface, the trend of ROCE at Eumundi Group doesn't inspire confidence. Around five years ago the returns on capital were 6.5%, but since then they've fallen to 2.3%. 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.

The Bottom Line

In summary, we're somewhat concerned by Eumundi Group's diminishing returns on increasing amounts of capital. However the stock has delivered a 44% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Eumundi Group, we've spotted 4 warning signs, and 2 of them shouldn't be ignored.

While Eumundi Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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