Hyrican Informationssysteme (FRA:HYI) 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? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Hyrican Informationssysteme (FRA:HYI), we weren't too hopeful.

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What Is 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. The formula for this calculation on Hyrican Informationssysteme is:

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

0.011 = €327k ÷ (€31m - €2.1m) (Based on the trailing twelve months to December 2024).

Therefore, Hyrican Informationssysteme has an ROCE of 1.1%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 8.1%.

Check out our latest analysis for Hyrican Informationssysteme

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hyrican Informationssysteme's ROCE against it's prior returns. If you're interested in investigating Hyrican Informationssysteme's past further, check out this free graph covering Hyrican Informationssysteme's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Hyrican Informationssysteme's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 4.4% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Hyrican Informationssysteme to turn into a multi-bagger.

On a related note, Hyrican Informationssysteme has decreased its current liabilities to 6.6% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On Hyrican Informationssysteme's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 67% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 2 warning signs with Hyrican Informationssysteme (at least 1 which is concerning) , and understanding these would certainly be useful.

While Hyrican Informationssysteme 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.