When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Lanson-BCC (EPA:ALLAN), so let's see why.
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. The formula for this calculation on Lanson-BCC is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = €16m ÷ (€951m - €301m) (Based on the trailing twelve months to June 2020).
Therefore, Lanson-BCC has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Beverage industry average of 3.6%.
See our latest analysis for Lanson-BCC
In the above chart we have measured Lanson-BCC'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 report for Lanson-BCC.
What Does the ROCE Trend For Lanson-BCC Tell Us?
There is reason to be cautious about Lanson-BCC, given the returns are trending downwards. To be more specific, the ROCE was 4.4% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Lanson-BCC to turn into a multi-bagger.
In Conclusion...
In summary, it's unfortunate that Lanson-BCC is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 32% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Like most companies, Lanson-BCC does come with some risks, and we've found 1 warning sign that you should be aware of.
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 ENXTPA:ALLAN
Adequate balance sheet and fair value.
