Zarneni Hrani Bulgaria AD (BUL:ZHBG) Has Some Difficulty Using Its Capital Effectively

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. 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)

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. 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)

0.013 = лв4.8m ÷ (лв415m - лв46m) (Based on the trailing twelve months to March 2023).

Thus, Zarneni Hrani Bulgaria AD has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.8%.

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.

SWOT Analysis for Zarneni Hrani Bulgaria AD

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. Unfortunately the returns on capital have diminished from the 1.7% that they were earning five years ago. 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 11% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

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. It should come as no surprise then that the stock has fallen 62% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Zarneni Hrani Bulgaria AD, you might be interested to know about the 1 warning sign that our analysis has discovered.

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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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.