Here's What's Concerning About Karamolengos Bakery Industry's (ATH:KMOL) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Karamolengos Bakery Industry (ATH:KMOL) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Karamolengos Bakery Industry, this is the formula:

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

0.053 = €3.9m ÷ (€127m - €54m) (Based on the trailing twelve months to June 2020).

So, Karamolengos Bakery Industry has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Food industry average of 8.1%.

View our latest analysis for Karamolengos Bakery Industry

Historical performance is a great place to start when researching a stock so above you can see the gauge for Karamolengos Bakery Industry's ROCE against it's prior returns. If you're interested in investigating Karamolengos Bakery Industry's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Karamolengos Bakery Industry. To be more specific, the ROCE was 7.6% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Karamolengos Bakery Industry to turn into a multi-bagger.

Another thing to note, Karamolengos Bakery Industry has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Karamolengos Bakery Industry's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Yet despite these poor fundamentals, the stock has gained a huge 138% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 1 warning sign for Karamolengos Bakery Industry you'll probably want to know about.

While Karamolengos Bakery Industry 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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