The Returns On Capital At LEWAG Holding (FRA:KGR) 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. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount 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 LEWAG Holding (FRA:KGR), so let's see why.

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

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 LEWAG Holding is:

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

0.10 = €5.4m ÷ (€119m - €65m) (Based on the trailing twelve months to December 2024).

So, LEWAG Holding has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 9.1% generated by the Machinery industry.

View our latest analysis for LEWAG Holding

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're interested in investigating LEWAG Holding's past further, check out this free graph covering LEWAG Holding's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at LEWAG Holding. About five years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on LEWAG Holding becoming one if things continue as they have.

On a side note, LEWAG Holding's current liabilities have increased over the last five years to 55% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 10%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Key Takeaway

In summary, it's unfortunate that LEWAG Holding is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 240% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you want to continue researching LEWAG Holding, you might be interested to know about the 2 warning signs that our analysis has discovered.

While LEWAG Holding 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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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.