Here's What's Concerning About SLOMAN NEPTUN Schiffahrts-Aktiengesellschaft's (HMSE:NEP) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at SLOMAN NEPTUN Schiffahrts-Aktiengesellschaft (HMSE:NEP), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for SLOMAN NEPTUN Schiffahrts-Aktiengesellschaft:

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

0.023 = €6.4m ÷ (€313m - €35m) (Based on the trailing twelve months to December 2020).

So, SLOMAN NEPTUN Schiffahrts-Aktiengesellschaft has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Shipping industry average of 5.0%.

Check out our latest analysis for SLOMAN NEPTUN Schiffahrts-Aktiengesellschaft

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 want to delve into the historical earnings, revenue and cash flow of SLOMAN NEPTUN Schiffahrts-Aktiengesellschaft, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about SLOMAN NEPTUN Schiffahrts-Aktiengesellschaft, given the returns are trending downwards. About five years ago, returns on capital were 7.2%, 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. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on SLOMAN NEPTUN Schiffahrts-Aktiengesellschaft becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that SLOMAN NEPTUN Schiffahrts-Aktiengesellschaft is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 20% 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.

On a final note, we found 3 warning signs for SLOMAN NEPTUN Schiffahrts-Aktiengesellschaft (2 can't be ignored) you should be aware of.

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