When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at ARYZTA (VTX:ARYN), we've spotted some signs that it could be struggling, so let's investigate.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on ARYZTA is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0014 = €4.4m ÷ (€3.9b - €820m) (Based on the trailing twelve months to January 2020).
Therefore, ARYZTA has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Food industry average of 9.7%.
See our latest analysis for ARYZTA
In the above chart we have a measured ARYZTA's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering ARYZTA here for free.
What Can We Tell From ARYZTA's ROCE Trend?
The trend of returns that ARYZTA is generating are raising some concerns. The company used to generate 4.0% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 47% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.
What We Can Learn From ARYZTA's ROCE
To see ARYZTA reducing the capital employed in the business in tandem with diminishing returns, is concerning. This could explain why the stock has sunk a total of 95% in the last five years. Unless these trends revert to a more positive trajectory, we would look elsewhere.
ARYZTA does have some risks though, and we've spotted 2 warning signs for ARYZTA that you might be interested in.
While ARYZTA 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. 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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About SWX:ARYN
ARYZTA
Provides products and services for in-store bakery solutions in Europe and internationally.
Proven track record and fair value.
