Union Coop (DFM:UNIONCOOP) Could Be At Risk Of Shrinking As A Company

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Union Coop (DFM:UNIONCOOP), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Union Coop, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = د.إ332m ÷ (د.إ3.4b - د.إ539m) (Based on the trailing twelve months to June 2023).

So, Union Coop has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.6% generated by the Consumer Retailing industry.

View our latest analysis for Union Coop

Historical performance is a great place to start when researching a stock so above you can see the gauge for Union Coop's ROCE against it's prior returns. If you'd like to look at how Union Coop has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Union Coop's ROCE Trending?

We are a bit worried about the trend of returns on capital at Union Coop. Unfortunately the returns on capital have diminished from the 15% that they were earning three years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Union Coop becoming one if things continue as they have.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 26% over the last year, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 2 warning signs facing Union Coop that you might find interesting.

While Union Coop 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.