Returns On Capital Signal Difficult Times Ahead For N. Varveris-Moda Bagno (ATH:MODA)

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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, N. Varveris-Moda Bagno (ATH:MODA) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on N. Varveris-Moda Bagno is:

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).

So, N. Varveris-Moda Bagno has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 10%.

Check out our latest analysis for N. Varveris-Moda Bagno

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're interested in investigating N. Varveris-Moda Bagno's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From N. Varveris-Moda Bagno's ROCE Trend?

In terms of N. Varveris-Moda Bagno's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 5.9%, however they're now substantially lower than that as we saw above. 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. If these trends continue, we wouldn't expect N. Varveris-Moda Bagno to turn into a multi-bagger.

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. Yet despite these poor fundamentals, the stock has gained a huge 125% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

N. Varveris-Moda Bagno does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

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

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