Zarneni Hrani Bulgaria AD (BUL:ZHBG) Could Be At Risk Of Shrinking As A Company

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Zarneni Hrani Bulgaria AD (BUL:ZHBG), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for Zarneni Hrani Bulgaria AD, this is the formula:

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

0.0025 = лв938k ÷ (лв417m - лв47m) (Based on the trailing twelve months to June 2022).

Therefore, Zarneni Hrani Bulgaria AD has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Food industry average of 12%.

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.

How Are Returns Trending?

There is reason to be cautious about Zarneni Hrani Bulgaria AD, given the returns are trending downwards. To be more specific, the ROCE was 1.9% four years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. 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.

The Key Takeaway

In summary, it's unfortunate that Zarneni Hrani Bulgaria AD is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 60% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Zarneni Hrani Bulgaria AD (1 is a bit unpleasant) you should be aware of.

While Zarneni Hrani Bulgaria AD 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.