Be Wary Of eDreams ODIGEO (BME:EDR) And Its Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. In light of that, from a first glance at eDreams ODIGEO (BME:EDR), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

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 eDreams ODIGEO is:

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

0.065 = €41m ÷ (€1.1b - €470m) (Based on the trailing twelve months to September 2024).

Therefore, eDreams ODIGEO has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 15%.

View our latest analysis for eDreams ODIGEO

In the above chart we have measured eDreams ODIGEO's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for eDreams ODIGEO .

So How Is eDreams ODIGEO's ROCE Trending?

We are a bit anxious about the trends of ROCE at eDreams ODIGEO. To be more specific, today's ROCE was 10% five years ago but has since fallen to 6.5%. In addition to that, eDreams ODIGEO is now employing 30% less capital than it was five years ago. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 43%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 6.5%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On eDreams ODIGEO's ROCE

To see eDreams ODIGEO reducing the capital employed in the business in tandem with diminishing returns, is concerning. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 89% 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.

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

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.