The Returns On Capital At ElringKlinger (ETR:ZIL2) Don't Inspire Confidence

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount 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 ElringKlinger (ETR:ZIL2), we weren't too hopeful.

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. Analysts use this formula to calculate it for ElringKlinger:

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

0.0071 = €11m ÷ (€2.0b - €498m) (Based on the trailing twelve months to September 2020).

Therefore, ElringKlinger has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.2%.

View our latest analysis for ElringKlinger

In the above chart we have measured ElringKlinger's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for ElringKlinger.

How Are Returns Trending?

In terms of ElringKlinger's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 9.9% five years ago, but since then it has dropped noticeably. 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 ElringKlinger to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that ElringKlinger is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 27% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

ElringKlinger does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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