Some Investors May Be Worried About Athens Water Supply and Sewerage's (ATH:EYDAP) Returns On Capital

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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Athens Water Supply and Sewerage (ATH:EYDAP), we weren't too hopeful.

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. To calculate this metric for Athens Water Supply and Sewerage, this is the formula:

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

0.012 = €17m ÷ (€1.5b - €111m) (Based on the trailing twelve months to September 2022).

Thus, Athens Water Supply and Sewerage has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 3.9%.

See 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're interested in investigating Athens Water Supply and Sewerage's past further, check out this free graph of past earnings, revenue and cash flow.

SWOT Analysis for Athens Water Supply and Sewerage

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Athens Water Supply and Sewerage. About five years ago, returns on capital were 3.0%, 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Athens Water Supply and Sewerage becoming one if things continue as they have.

In Conclusion...

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 concerning fundamentals, the stock has performed strongly with a 48% return 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.

Athens Water Supply and Sewerage does have some risks, we noticed 3 warning signs (and 2 which are significant) we think you should know about.

While Athens Water Supply and Sewerage may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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

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.