BHB Brauholding Bayern-Mitte (FRA:B9B) Will Be Hoping To Turn Its Returns On Capital Around

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. 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. Having said that, after a brief look, BHB Brauholding Bayern-Mitte (FRA:B9B) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for BHB Brauholding Bayern-Mitte, this is the formula:

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

0.019 = €239k ÷ (€15m - €2.1m) (Based on the trailing twelve months to June 2022).

So, BHB Brauholding Bayern-Mitte has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 7.7%.

Our analysis indicates that B9B is potentially undervalued!

Above you can see how the current ROCE for BHB Brauholding Bayern-Mitte compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering BHB Brauholding Bayern-Mitte here for free.

How Are Returns Trending?

In terms of BHB Brauholding Bayern-Mitte's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 3.1% 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. If these trends continue, we wouldn't expect BHB Brauholding Bayern-Mitte to turn into a multi-bagger.

In Conclusion...

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. Long term shareholders who've owned the stock over the last five years have experienced a 19% depreciation in their investment, so it appears the market might not like these trends either. 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 2 warning signs we've spotted with BHB Brauholding Bayern-Mitte (including 1 which is concerning) .

While BHB Brauholding Bayern-Mitte 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.