bet-at-home.com (ETR:ACX) May Have Issues Allocating Its Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at bet-at-home.com (ETR:ACX), so let's see why.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on bet-at-home.com is:

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

0.17 = €4.7m ÷ (€57m - €29m) (Based on the trailing twelve months to June 2022).

Thus, bet-at-home.com has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 4.4% generated by the Hospitality industry.

View our latest analysis for bet-at-home.com

Above you can see how the current ROCE for bet-at-home.com 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 bet-at-home.com.

What Can We Tell From bet-at-home.com's ROCE Trend?

In terms of bet-at-home.com's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 17% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 59% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 51%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 17%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line

In summary, it's unfortunate that bet-at-home.com is shrinking its capital base and also generating lower returns. Unsurprisingly then, the stock has dived 93% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with bet-at-home.com (including 2 which are a bit unpleasant) .

While bet-at-home.com 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.