Capital Allocation Trends At Fresenius SE KGaA (ETR:FRE) Aren't Ideal

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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Fresenius SE KGaA (ETR:FRE) we aren't filled with optimism, but let's investigate further.

What Is 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. To calculate this metric for Fresenius SE KGaA, this is the formula:

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

0.042 = €1.4b ÷ (€42b - €8.3b) (Based on the trailing twelve months to September 2024).

Thus, Fresenius SE KGaA has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 5.5%.

View our latest analysis for Fresenius SE KGaA

Above you can see how the current ROCE for Fresenius SE KGaA compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Fresenius SE KGaA .

The Trend Of ROCE

The trend of ROCE at Fresenius SE KGaA is showing some signs of weakness. The company used to generate 8.5% on its capital five years ago but it has since fallen noticeably. In addition to that, Fresenius SE KGaA is now employing 36% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line

To see Fresenius SE KGaA reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 19% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a separate note, we've found 1 warning sign for Fresenius SE KGaA you'll probably want to know about.

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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.