Zarneni Hrani Bulgaria AD (BUL:ZHBG) Could Be Struggling To Allocate Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Zarneni Hrani Bulgaria AD (BUL:ZHBG), the trends above didn't look too great.

Return On Capital Employed (ROCE): What is it?

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)

0.0011 = лв398k ÷ (лв418m - лв47m) (Based on the trailing twelve months to September 2021).

So, Zarneni Hrani Bulgaria AD has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the Food industry average of 11%.

Check out our latest analysis for Zarneni Hrani Bulgaria AD

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zarneni Hrani Bulgaria AD's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Zarneni Hrani Bulgaria AD, check out these free graphs here.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Zarneni Hrani Bulgaria AD. Unfortunately the returns on capital have diminished from the 1.6% that they were earning three years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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.

In Conclusion...

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 59% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a separate note, we've found 1 warning sign for Zarneni Hrani Bulgaria AD you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.