Here's What's Concerning About Zarneni Hrani Bulgaria AD's (BUL:ZHBG) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Zarneni Hrani Bulgaria AD (BUL:ZHBG) we aren't filled with optimism, but let's investigate further.

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

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 Zarneni Hrani Bulgaria AD:

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

0.0079 = лв2.9m ÷ (лв414m - лв45m) (Based on the trailing twelve months to June 2023).

So, Zarneni Hrani Bulgaria AD has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.4%.

Check out our latest analysis for Zarneni Hrani Bulgaria AD

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Zarneni Hrani Bulgaria AD has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Zarneni Hrani Bulgaria AD's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 1.9%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Zarneni Hrani Bulgaria AD to turn into a multi-bagger.

What We Can Learn From Zarneni Hrani Bulgaria AD'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. Investors haven't taken kindly to these developments, since the stock has declined 55% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Zarneni Hrani Bulgaria AD does have some risks though, and we've spotted 1 warning sign for Zarneni Hrani Bulgaria AD that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.