Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Countryside Properties (LON:CSP) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Countryside Properties, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.019 = UK£25m ÷ (UK£1.7b - UK£354m) (Based on the trailing twelve months to March 2021).
Therefore, Countryside Properties has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 7.0%.
View our latest analysis for Countryside Properties
Above you can see how the current ROCE for Countryside Properties compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Countryside Properties.
How Are Returns Trending?
We weren't thrilled with the trend because Countryside Properties' ROCE has reduced by 87% over the last five years, while the business employed 116% more capital. That being said, Countryside Properties raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Countryside Properties' earnings and if they change as a result from the capital raise.
The Key Takeaway
In summary, we're somewhat concerned by Countryside Properties' diminishing returns on increasing amounts of capital. Since the stock has skyrocketed 151% over the last five years, it looks like investors have high expectations of the stock. 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 spotted 1 warning sign facing Countryside Properties that you might find interesting.