How Has A.S. Création Tapeten (ETR:ACWN) Allocated Its Capital?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. 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 A.S. Création Tapeten (ETR:ACWN), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

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 A.S. Création Tapeten:

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

0.049 = €5.0m ÷ (€129m - €27m) (Based on the trailing twelve months to September 2020).

Thus, A.S. Création Tapeten has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 8.5%.

View our latest analysis for A.S. Création Tapeten

Above you can see how the current ROCE for A.S. Création Tapeten 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 A.S. Création Tapeten.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at A.S. Création Tapeten. Unfortunately the returns on capital have diminished from the 8.5% 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on A.S. Création Tapeten becoming one if things continue as they have.

The Bottom Line On A.S. Création Tapeten's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 44% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

A.S. Création Tapeten does have some risks though, and we've spotted 2 warning signs for A.S. Création Tapeten that you might be interested in.

While A.S. Création Tapeten 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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