Costamp group (BIT: MOLD) could struggle to allocate capital

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To find multi-bagger stock, what are the underlying trends we need to look for in a business? In a perfect world, we would like a business to invest more capital in their business, and ideally the returns from that capital increase as well. Put simply, these types of businesses are dialing machines, which means they continually reinvest their profits at ever higher rates of return. That said, from the first glance at Costamp Group (BIT: MOLD) We’re not jumping from our chairs on the trend of returns, but taking a closer look.

What is Return on Employee Capital (ROCE)?

For those who don’t know what ROCE is, it measures the amount of pre-tax profit a business can generate from the capital employed in its business. The formula for this calculation on Costamp Group is:

Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)

0.026 = 1.5 M € ÷ (98 M € – 40 M €) (Based on the last twelve months up to December 2020).

Thereby, The Costamp Group has a ROCE of 2.6%. In absolute terms, this is a low efficiency and it is also below the machinery industry average of 8.7%.

Consult our latest analysis for the Costamp group

BIT: MOLD Return on capital employed September 30, 2021

Historical performance is a great place to start when looking for a stock. So you can see above the gauge of the ROCE of Costamp Group compared to its past returns. If you want to delve into the history of Profit, Revenue and Cash Flow of the Costamp Group, check out these free graphics here.

What does the Costamp group’s ROCE trend tell us?

In terms of the Costamp Group’s historic ROCE movements, the trend is not fantastic. About five years ago, returns on capital were 9.3%, but since then they have fallen to 2.6%. Considering the company is employing more capital while revenues have declined, this is a bit of a concern. If this were to continue, you might consider a business that is trying to reinvest for growth, but is actually losing market share since sales haven’t increased.

In addition, the Costamp group has done well to reduce its current liabilities to 41% of total assets. So we could link some of that to the decrease in ROCE. In addition, it can reduce some aspects of the risk to the business, as the company’s suppliers or short-term creditors are now less funding its operations. Since the company essentially finances a larger portion of its operations with its own money, you could argue that this has made the company less efficient at generating ROCE. Keep in mind that 41% is still quite high, so these risks are still somewhat prevalent.

In conclusion…

We are a little worried about the Costamp group because, despite deploying more capital in the company, the return on that capital and sales have both fallen. We believe this has contributed to the stock’s fall of 75% over the past three years. However, unless the underlying trends return to a more positive trajectory, we would consider looking elsewhere.

If you want to know some of the risks that the Costamp Group faces, we have found 4 warning signs (2 cannot be ignored!) Which you should be aware of before investing here.

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

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.

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