Capital Allocation Trends At Électricite de Strasbourg Société Anonyme (EPA:ELEC) Aren't Ideal

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Électricite de Strasbourg Société Anonyme (EPA:ELEC) we aren't filled with optimism, but let's investigate further.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Électricite de Strasbourg Société Anonyme, this is the formula:

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

0.05 = €70m ÷ (€2.1b - €651m) (Based on the trailing twelve months to December 2022).

So, Électricite de Strasbourg Société Anonyme has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Electric Utilities industry average of 7.2%.

View our latest analysis for Électricite de Strasbourg Société Anonyme

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 want to delve into the historical earnings, revenue and cash flow of Électricite de Strasbourg Société Anonyme, check out these free graphs here.

So How Is Électricite de Strasbourg Société Anonyme's ROCE Trending?

In terms of Électricite de Strasbourg Société Anonyme's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.5% 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Électricite de Strasbourg Société Anonyme becoming one if things continue as they have.

On a side note, Électricite de Strasbourg Société Anonyme's current liabilities have increased over the last five years to 32% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

The Bottom Line On Électricite de Strasbourg Société Anonyme's ROCE

In summary, it's unfortunate that Électricite de Strasbourg Société Anonyme is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 36% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Électricite de Strasbourg Société Anonyme, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Électricite de Strasbourg Société Anonyme 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.