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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. 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 Eumundi Group (ASX:EBG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What is it?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Eumundi Group:
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).
Therefore, Eumundi Group has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 7.7%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Eumundi Group's ROCE against it's prior returns. If you're interested in investigating Eumundi Group's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Eumundi Group, we didn't gain much 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. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
What We Can Learn From Eumundi Group's ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Eumundi Group have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 93% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
One more thing: We've identified 5 warning signs with Eumundi Group (at least 2 which shouldn't be ignored) , and understanding them would certainly be useful.
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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