Capital Allocation Trends At Plastiques du Val de Loire (EPA:PVL) Aren't Ideal

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Plastiques du Val de Loire (EPA:PVL), we've spotted some signs that it could be struggling, so let's investigate.

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What Is 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 Plastiques du Val de Loire is:

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

0.021 = €8.8m ÷ (€718m - €290m) (Based on the trailing twelve months to September 2024).

Therefore, Plastiques du Val de Loire has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 6.3%.

See our latest analysis for Plastiques du Val de Loire

In the above chart we have measured Plastiques du Val de Loire'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 Plastiques du Val de Loire .

What Does the ROCE Trend For Plastiques du Val de Loire Tell Us?

There is reason to be cautious about Plastiques du Val de Loire, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 7.7% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Plastiques du Val de Loire becoming one if things continue as they have.

On a side note, Plastiques du Val de Loire's current liabilities are still rather high at 40% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Plastiques du Val de Loire's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 69% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Plastiques du Val de Loire we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Plastiques du Val de Loire may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.