Returns On Capital Signal Difficult Times Ahead For Landshuter Kunstmuehle (MUN:LKM)

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Landshuter Kunstmuehle (MUN:LKM), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Landshuter Kunstmuehle:

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

0.08 = €868k ÷ (€12m - €688k) (Based on the trailing twelve months to December 2022).

Therefore, Landshuter Kunstmuehle has an ROCE of 8.0%. Ultimately, that's a low return and it under-performs the Food industry average of 10%.

Check out our latest analysis for Landshuter Kunstmuehle

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'd like to look at how Landshuter Kunstmuehle has performed in the past in other metrics, you can view this free graph of Landshuter Kunstmuehle's past earnings, revenue and cash flow.

What Can We Tell From Landshuter Kunstmuehle's ROCE Trend?

In terms of Landshuter Kunstmuehle's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Landshuter Kunstmuehle becoming one if things continue as they have.

The Bottom Line On Landshuter Kunstmuehle'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 6.6% 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.

If you want to know some of the risks facing Landshuter Kunstmuehle we've found 3 warning signs (2 are potentially serious!) that you should be aware of before investing here.

While Landshuter Kunstmuehle 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.