Philippos Nakas (ATH:NAKAS) 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? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Philippos Nakas (ATH:NAKAS), we weren't too hopeful.

Understanding 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 Philippos Nakas is:

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

0.034 = €808k ÷ (€29m - €5.2m) (Based on the trailing twelve months to December 2020).

Thus, Philippos Nakas has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 12%.

See our latest analysis for Philippos Nakas

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 Philippos Nakas, check out these free graphs here.

What Does the ROCE Trend For Philippos Nakas Tell Us?

We are a bit worried about the trend of returns on capital at Philippos Nakas. Unfortunately the returns on capital have diminished from the 6.5% that they were earning five years ago. 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 Philippos Nakas to turn into a multi-bagger.

The Bottom Line On Philippos Nakas' ROCE

In summary, it's unfortunate that Philippos Nakas is generating lower returns from the same amount of capital. Since the stock has skyrocketed 348% over the last five years, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing Philippos Nakas we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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