Does Adris grupa d. d's (ZGSE:ADRS) Returns On Capital Reflect Well On The Business?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Adris grupa d. d (ZGSE:ADRS), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Adris grupa d. d:

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

0.0064 = Kn115m ÷ (Kn22b - Kn4.2b) (Based on the trailing twelve months to September 2020).

So, Adris grupa d. d has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Industrials industry average of 5.7%.

Check out our latest analysis for Adris grupa d. d

In the above chart we have measured Adris grupa d. d's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Adris grupa d. d.

What The Trend Of ROCE Can Tell Us

In terms of Adris grupa d. d's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 15%, 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Adris grupa d. d 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. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 1 warning sign with Adris grupa d. d and understanding this should be part of your investment process.

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