The Returns On Capital At Pilkington Deutschland (HMSE:FDD) Don't Inspire Confidence

What underlying fundamental trends can indicate that a company might be in decline? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Pilkington Deutschland (HMSE:FDD), we weren't too hopeful.

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. The formula for this calculation on Pilkington Deutschland is:

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%. Ultimately, that's a low return and it under-performs the Building industry average of 14%.

View 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 want to delve into the historical earnings, revenue and cash flow of Pilkington Deutschland, check out these free graphs here.

How Are Returns Trending?

In terms of Pilkington Deutschland's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 3.9% that they were earning five years ago. 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 Pilkington Deutschland to turn into a multi-bagger.

The Bottom Line 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. Despite the concerning underlying trends, the stock has actually gained 9.2% 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.

One final note, you should learn about the 3 warning signs we've spotted with Pilkington Deutschland (including 1 which is concerning) .

While Pilkington Deutschland 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.