Koenig & Bauer's (ETR:SKB) Returns On Capital Tell Us There Is Reason To Feel Uneasy

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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Koenig & Bauer (ETR:SKB), 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 Koenig & Bauer, this is the formula:

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

0.022 = €16m ÷ (€1.4b - €661m) (Based on the trailing twelve months to September 2022).

Therefore, Koenig & Bauer has an ROCE of 2.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.1%.

See our latest analysis for Koenig & Bauer

Above you can see how the current ROCE for Koenig & Bauer compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Koenig & Bauer.

The Trend Of ROCE

There is reason to be cautious about Koenig & Bauer, given the returns are trending downwards. About five years ago, returns on capital were 7.2%, however they're now substantially lower than that as we saw above. 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 Koenig & Bauer to turn into a multi-bagger.

On a separate but related note, it's important to know that Koenig & Bauer has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In summary, it's unfortunate that Koenig & Bauer is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 71% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Koenig & Bauer could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Koenig & Bauer 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.

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

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.