Fazerles AD's (BUL:FZLS) Returns On Capital Not Reflecting Well On The Business

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Fazerles AD (BUL:FZLS), the trends above didn't look too great.

What is 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 Fazerles AD, this is the formula:

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

0.0044 = лв98k ÷ (лв23m - лв444k) (Based on the trailing twelve months to December 2020).

Thus, Fazerles AD has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Forestry industry average of 6.4%.

Check out our latest analysis for Fazerles 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 Fazerles AD, check out these free graphs here.

What Does the ROCE Trend For Fazerles AD Tell Us?

There is reason to be cautious about Fazerles AD, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 1.5% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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.

The Bottom Line On Fazerles AD's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 54% depreciation in their investment, so it appears the market might not like these trends either. 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 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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