Is Bodegas Riojanas (BME:RIO) Headed For Trouble?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Having said that, after a brief look, Bodegas Riojanas (BME:RIO) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Bodegas Riojanas, this is the formula:

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

0.013 = €506k ÷ (€52m - €13m) (Based on the trailing twelve months to September 2020).

Therefore, Bodegas Riojanas has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Beverage industry average of 8.4%.

View our latest analysis for Bodegas Riojanas

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're interested in investigating Bodegas Riojanas' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Bodegas Riojanas' ROCE Trend?

In terms of Bodegas Riojanas' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 5.5%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Bodegas Riojanas becoming one if things continue as they have.

Our Take On Bodegas Riojanas' ROCE

In summary, it's unfortunate that Bodegas Riojanas 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 17% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Bodegas Riojanas, we've spotted 3 warning signs, and 2 of them make us uncomfortable.

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. 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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