When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Mainova (FRA:MNV6), so let's see why.
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 Mainova is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00069 = €1.7m ÷ (€3.2b - €665m) (Based on the trailing twelve months to December 2019).
Thus, Mainova has an ROCE of 0.07%. Ultimately, that's a low return and it under-performs the Integrated Utilities industry average of 1.7%.
See our latest analysis for Mainova
Historical performance is a great place to start when researching a stock so above you can see the gauge for Mainova's ROCE against it's prior returns. If you'd like to look at how Mainova has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Mainova's ROCE Trend?
We are a bit worried about the trend of returns on capital at Mainova. Unfortunately the returns on capital have diminished from the 1.1% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Mainova to turn into a multi-bagger.
The Bottom Line On Mainova's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Since the stock has skyrocketed 105% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Mainova (of which 1 is a bit unpleasant!) that you should know about.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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This article by Simply Wall St is general in nature. 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.
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About DB:MNV6
Average dividend payer low.
