Københavns Lufthavne (CPH:KBHL) Will Be Looking To Turn Around Its Returns

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Københavns Lufthavne (CPH:KBHL) we aren't filled with optimism, but let's investigate further.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Københavns Lufthavne is:

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

0.07 = kr.583m ÷ (kr.15b - kr.7.1b) (Based on the trailing twelve months to June 2023).

So, Københavns Lufthavne has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 8.8%.

Check out our latest analysis for Københavns Lufthavne

Historical performance is a great place to start when researching a stock so above you can see the gauge for Københavns Lufthavne's ROCE against it's prior returns. If you'd like to look at how Københavns Lufthavne has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Københavns Lufthavne Tell Us?

There is reason to be cautious about Københavns Lufthavne, given the returns are trending downwards. To be more specific, the ROCE was 18% five years ago, but since then it has dropped noticeably. 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. If these trends continue, we wouldn't expect Københavns Lufthavne to turn into a multi-bagger.

On a side note, Københavns Lufthavne's current liabilities have increased over the last five years to 46% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 7.0%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Københavns Lufthavne's ROCE

In summary, it's unfortunate that Københavns Lufthavne is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 14% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 2 warning signs for Københavns Lufthavne you'll probably want to know about.

While Københavns Lufthavne 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.