How Has Fazerles AD (BUL:4F6) Allocated Its Capital?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Fazerles AD (BUL:4F6), we weren't too hopeful.

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 Fazerles AD is:

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

0.013 = лв295k ÷ (лв23m - лв670k) (Based on the trailing twelve months to September 2020).

Thus, Fazerles AD has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Forestry industry average of 5.7%.

See our latest analysis for Fazerles AD

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

What The Trend Of ROCE Can Tell Us

In terms of Fazerles AD's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 3.9% 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 Fazerles AD becoming one if things continue as they have.

Our Take On Fazerles AD's ROCE

In summary, it's unfortunate that Fazerles AD is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 67% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 2 warning signs with Fazerles AD and understanding these should be part of your investment process.

While Fazerles 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. 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.
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