Capital Allocation Trends At Figeac Aero Société Anonyme (EPA:FGA) Aren't Ideal

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Figeac Aero Société Anonyme (EPA:FGA), we weren't too hopeful.

What Is 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. Analysts use this formula to calculate it for Figeac Aero Société Anonyme:

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

0.028 = €11m ÷ (€652m - €265m) (Based on the trailing twelve months to September 2024).

Therefore, Figeac Aero Société Anonyme has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Aerospace & Defense industry average of 9.5%.

View our latest analysis for Figeac Aero Société Anonyme

In the above chart we have measured Figeac Aero Société Anonyme's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Figeac Aero Société Anonyme .

What Can We Tell From Figeac Aero Société Anonyme's ROCE Trend?

We are a bit anxious about the trends of ROCE at Figeac Aero Société Anonyme. Unfortunately, returns have declined substantially over the last five years to the 2.8% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 35% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a side note, Figeac Aero Société Anonyme's current liabilities have increased over the last five years to 41% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.8%. 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.

The Bottom Line

In summary, it's unfortunate that Figeac Aero Société Anonyme is shrinking its capital base and also generating lower returns. 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.

Figeac Aero Société Anonyme could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for FGA on our platform quite valuable.

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.