Pilkington Deutschland (HMSE:FDD) Is Finding It Tricky To Allocate Its Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Pilkington Deutschland (HMSE:FDD), so let's see why.

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. Analysts use this formula to calculate it for Pilkington Deutschland:

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

0.0047 = €2.0m ÷ (€487m - €66m) (Based on the trailing twelve months to March 2021).

Thus, Pilkington Deutschland has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Building industry average of 14%.

Check out our latest analysis for Pilkington Deutschland

Historical performance is a great place to start when researching a stock so above you can see the gauge for Pilkington Deutschland's ROCE against it's prior returns. If you're interested in investigating Pilkington Deutschland's past further, check out this free graph of 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 Pilkington Deutschland. To be more specific, the ROCE was 3.9% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Pilkington Deutschland becoming one if things continue as they have.

The Bottom Line On Pilkington Deutschland's ROCE

In summary, it's unfortunate that Pilkington Deutschland is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 28% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Like most companies, Pilkington Deutschland does come with some risks, and we've found 1 warning sign that you should be aware of.

While Pilkington Deutschland 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.

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.

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