Here's What We Make Of Moda Bagno - N. Varveris' (ATH:MODA) Returns On Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Moda Bagno - N. Varveris (ATH:MODA) we aren't filled with optimism, but let's investigate further.

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 Moda Bagno - N. Varveris:

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

0.031 = €947k ÷ (€43m - €12m) (Based on the trailing twelve months to June 2020).

Thus, Moda Bagno - N. Varveris has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 9.7%.

See our latest analysis for Moda Bagno - N. Varveris

Historical performance is a great place to start when researching a stock so above you can see the gauge for Moda Bagno - N. Varveris' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Moda Bagno - N. Varveris, check out these free graphs here.

So How Is Moda Bagno - N. Varveris' ROCE Trending?

In terms of Moda Bagno - N. Varveris' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 5.9% 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. 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 Moda Bagno - N. Varveris becoming one if things continue as they have.

The Bottom Line

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. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 173%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Moda Bagno - N. Varveris, we've spotted 2 warning signs, and 1 of them can't be ignored.

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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.
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