Yahoo Finance Investors Met With Slowing Returns on Capital At Eumundi Group (ASX:EBG)
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Eumundi Group (ASX:EBG), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Eumundi Group is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = AU$5.9m ÷ (AU$106m - AU$4.8m) (Based on the trailing twelve months to December 2023).
Thus, Eumundi Group has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 8.2%.
View our latest analysis for Eumundi Group
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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Eumundi Group.
The Trend Of ROCE
There are better returns on capital out there than what we're seeing at Eumundi Group. The company has employed 59% more capital in the last five years, and the returns on that capital have remained stable at 5.8%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
In Conclusion...
As we've seen above, Eumundi Group's returns on capital haven't increased but it is reinvesting in the business. Although the market must be expecting these trends to improve because the stock has gained 48% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Eumundi Group does have some risks, we noticed 7 warning signs (and 3 which are potentially serious) we think you should know about.
While Eumundi Group 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
