I.Kloukinas-I.Lappas (ATH:KLM) Could Be At Risk Of Shrinking As A Company

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into I.Kloukinas-I.Lappas (ATH:KLM), the trends above didn't look too great.

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 I.Kloukinas-I.Lappas, this is the formula:

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

0.0083 = €573k ÷ (€88m - €20m) (Based on the trailing twelve months to December 2020).

So, I.Kloukinas-I.Lappas has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 10%.

View our latest analysis for I.Kloukinas-I.Lappas

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 I.Kloukinas-I.Lappas, check out these free graphs here.

The Trend Of ROCE

In terms of I.Kloukinas-I.Lappas' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 1.3% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect I.Kloukinas-I.Lappas to turn into a multi-bagger.

The Bottom Line On I.Kloukinas-I.Lappas' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Since the stock has skyrocketed 250% over the last five years, it looks like investors have high expectations of the stock. 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 final note, we found 3 warning signs for I.Kloukinas-I.Lappas (1 is potentially serious) you should be aware of.

While I.Kloukinas-I.Lappas isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

If you're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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