Returns On Capital At Karamolengos Bakery Industry (ATH:KMOL) Paint A Concerning Picture

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Karamolengos Bakery Industry (ATH:KMOL), we weren't too upbeat about how things were going.

Understanding 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. Analysts use this formula to calculate it for Karamolengos Bakery Industry:

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).

Therefore, Karamolengos Bakery Industry has an ROCE of 5.3%. Ultimately, that's a low return and it under-performs the Food industry average of 8.3%.

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.

How Are Returns Trending?

In terms of Karamolengos Bakery Industry's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 7.6% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Karamolengos Bakery Industry becoming one if things continue as they have.

On a separate but related note, it's important to know that Karamolengos Bakery Industry has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Karamolengos Bakery Industry's ROCE

In summary, it's unfortunate that Karamolengos Bakery Industry is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 67% return 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.

One more thing to note, we've identified 2 warning signs with Karamolengos Bakery Industry and understanding them should be part of your investment process.

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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