The Returns On Capital At Zarneni Hrani Bulgaria AD (BUL:ZHBG) Don't Inspire Confidence

What underlying fundamental trends can indicate that a company might be 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. On that note, looking into Zarneni Hrani Bulgaria AD (BUL:ZHBG), we weren't too upbeat about how things were going.

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. The formula for this calculation on Zarneni Hrani Bulgaria AD is:

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

0.0064 = лв2.2m ÷ (лв400m - лв51m) (Based on the trailing twelve months to December 2020).

Thus, Zarneni Hrani Bulgaria AD has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.1%.

View 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 want to delve into the historical earnings, revenue and cash flow of Zarneni Hrani Bulgaria AD, check out these free graphs here.

What Does the ROCE Trend For Zarneni Hrani Bulgaria AD Tell Us?

We are a bit worried about the trend of returns on capital at Zarneni Hrani Bulgaria AD. About three years ago, returns on capital were 1.1%, 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. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Zarneni Hrani Bulgaria AD becoming one if things continue as they have.

On a side note, Zarneni Hrani Bulgaria AD has done well to pay down its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Zarneni Hrani Bulgaria AD's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 59% depreciation in their investment, so it appears the market might not like these trends either. 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, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

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.

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