Capital Allocation Trends At Groupe Berkem Société anonyme (EPA:ALKEM) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Groupe Berkem Société anonyme (EPA:ALKEM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Groupe Berkem Société anonyme:

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

0.034 = €2.0m ÷ (€92m - €33m) (Based on the trailing twelve months to June 2023).

Therefore, Groupe Berkem Société anonyme has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 4.7%.

See our latest analysis for Groupe Berkem Société anonyme

Above you can see how the current ROCE for Groupe Berkem Société anonyme compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Groupe Berkem Société anonyme for free.

What Can We Tell From Groupe Berkem Société anonyme's ROCE Trend?

When we looked at the ROCE trend at Groupe Berkem Société anonyme, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 3.4% from 9.0% four years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 36%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 3.4%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From Groupe Berkem Société anonyme's ROCE

We're a bit apprehensive about Groupe Berkem Société anonyme because despite more capital being deployed in the business, returns on that capital and sales have both fallen. This could explain why the stock has sunk a total of 72% in the last year. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Groupe Berkem Société anonyme we've found 4 warning signs (1 is potentially serious!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.