Returns On Capital Signal Difficult Times Ahead For Brouwerij Handelsmaatschappij (EBR:COBH)

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 the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Brouwerij Handelsmaatschappij (EBR:COBH) we aren't filled with optimism, but let's investigate further.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Brouwerij Handelsmaatschappij, this is the formula:

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

0.034 = €4.4m ÷ (€167m - €39m) (Based on the trailing twelve months to December 2022).

Thus, Brouwerij Handelsmaatschappij has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 9.8%.

View our latest analysis for Brouwerij Handelsmaatschappij

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

What Can We Tell From Brouwerij Handelsmaatschappij's ROCE Trend?

In terms of Brouwerij Handelsmaatschappij's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.3%, however they're now substantially lower than that as we saw above. 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 Brouwerij Handelsmaatschappij to turn into a multi-bagger.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 53% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Brouwerij Handelsmaatschappij, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Brouwerij Handelsmaatschappij 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.