Capital Allocation Trends At Athens Water Supply and Sewerage (ATH:EYDAP) Aren't Ideal

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Athens Water Supply and Sewerage (ATH:EYDAP) we aren't filled with optimism, but let's investigate further.

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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. Analysts use this formula to calculate it for Athens Water Supply and Sewerage:

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

0.023 = €32m ÷ (€1.5b - €102m) (Based on the trailing twelve months to June 2024).

Thus, Athens Water Supply and Sewerage has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 3.1%.

Check out our latest analysis for Athens Water Supply and Sewerage

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

What Does the ROCE Trend For Athens Water Supply and Sewerage Tell Us?

In terms of Athens Water Supply and Sewerage's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 4.1%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Athens Water Supply and Sewerage to turn into a multi-bagger.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 1.0% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Athens Water Supply and Sewerage does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

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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.