Fresenius SE KGaA (ETR:FRE) Is Finding It Tricky To Allocate Its Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Fresenius SE KGaA (ETR:FRE), we weren't too hopeful.

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

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. The formula for this calculation on Fresenius SE KGaA is:

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

0.038 = €1.3b ÷ (€44b - €9.2b) (Based on the trailing twelve months to June 2024).

Thus, Fresenius SE KGaA has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 5.5%.

See 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'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Fresenius SE KGaA .

What The Trend Of ROCE Can Tell Us

We are a bit anxious about the trends of ROCE at Fresenius SE KGaA. Unfortunately, returns have declined substantially over the last five years to the 3.8% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 33% 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.

The Bottom Line On Fresenius SE KGaA's ROCE

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 15% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching Fresenius SE KGaA, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Fresenius SE KGaA 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.