AVA Risk Group (ASX:AVA) Is Finding It Tricky To Allocate Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into AVA Risk Group (ASX:AVA), the trends above didn't look too great.

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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. Analysts use this formula to calculate it for AVA Risk Group:

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

0.013 = AU$306k ÷ (AU$30m - AU$6.3m) (Based on the trailing twelve months to June 2025).

Thus, AVA Risk Group has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 9.4%.

See our latest analysis for AVA Risk Group

Above you can see how the current ROCE for AVA Risk Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering AVA Risk Group for free.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about AVA Risk Group, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 24% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect AVA Risk Group to turn into a multi-bagger.

Our Take On AVA Risk Group's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Unsurprisingly then, the stock has dived 79% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing AVA Risk Group that you might find interesting.

While AVA Risk Group isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.