Zarneni Hrani Bulgaria AD's (BUL:ZHBG) Returns On Capital Not Reflecting Well On The Business

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Zarneni Hrani Bulgaria AD (BUL:ZHBG), we weren't too hopeful.

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. 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)

0.0045 = лв1.6m ÷ (лв399m - лв48m) (Based on the trailing twelve months to March 2021).

So, Zarneni Hrani Bulgaria AD has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 2.6%.

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

The Trend Of ROCE

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 three 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. If these trends continue, we wouldn't expect Zarneni Hrani Bulgaria AD to turn into a multi-bagger.

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 46% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 1 warning sign for Zarneni Hrani Bulgaria AD that we think you should be aware of.

While Zarneni Hrani Bulgaria AD isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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