Some Investors May Be Worried About Zwahlen & Mayr's (VTX:ZWM) Returns On Capital

What underlying fundamental trends can indicate that a company might be 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Zwahlen & Mayr (VTX:ZWM), so let's see why.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Zwahlen & Mayr is:

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

0.012 = CHF557k ÷ (CHF60m - CHF14m) (Based on the trailing twelve months to December 2023).

So, Zwahlen & Mayr has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Construction industry average of 10%.

Check out our latest analysis for Zwahlen & Mayr

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

What Does the ROCE Trend For Zwahlen & Mayr Tell Us?

We are a bit worried about the trend of returns on capital at Zwahlen & Mayr. Unfortunately the returns on capital have diminished from the 9.0% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Zwahlen & Mayr to turn into a multi-bagger.

Our Take On Zwahlen & Mayr's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 50% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 5 warning signs with Zwahlen & Mayr (at least 2 which can't be ignored) , and understanding these would certainly be useful.

While Zwahlen & Mayr 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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com