Pilkington Deutschland (HMSE:FDD) May Have Issues Allocating Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. In light of that, from a first glance at Pilkington Deutschland (HMSE:FDD), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the 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).

So, 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 15%.

Check out our latest analysis for Pilkington Deutschland

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 Pilkington Deutschland's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Pilkington Deutschland's ROCE Trend?

There is reason to be cautious about Pilkington Deutschland, given the returns are trending downwards. To be more specific, the ROCE was 3.9% 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. 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.

Our Take On Pilkington Deutschland'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. In spite of that, the stock has delivered a 23% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about Pilkington Deutschland, we've spotted 3 warning signs, and 1 of them can't be ignored.

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.

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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.