Investors Could Be Concerned With Balta Group's (EBR:BALTA) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Balta Group (EBR:BALTA), so let's see why.

Understanding 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. Analysts use this formula to calculate it for Balta Group:

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

0.048 = €28m ÷ (€804m - €224m) (Based on the trailing twelve months to December 2020).

Thus, Balta Group has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 11%.

See our latest analysis for Balta Group

In the above chart we have measured Balta Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

There is reason to be cautious about Balta Group, given the returns are trending downwards. To be more specific, the ROCE was 7.4% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Balta Group to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Balta Group is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 52% over the last three years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing Balta Group, we've discovered 1 warning sign that you should be aware of.

While Balta 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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