What These Trends Mean At Koncar - Elektroindustrija d.d (ZGSE:KOEI)

What financial metrics can indicate to us that a company is maturing or even 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. 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. In light of that, from a first glance at Koncar - Elektroindustrija d.d (ZGSE:KOEI), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Koncar - Elektroindustrija d.d is:

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

0.036 = Kn101m ÷ (Kn4.2b - Kn1.4b) (Based on the trailing twelve months to December 2020).

Therefore, Koncar - Elektroindustrija d.d has an ROCE of 3.6%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 10%.

See our latest analysis for Koncar - Elektroindustrija d.d

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 Koncar - Elektroindustrija d.d, check out these free graphs here.

What Can We Tell From Koncar - Elektroindustrija d.d's ROCE Trend?

In terms of Koncar - Elektroindustrija d.d's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 4.5% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Koncar - Elektroindustrija d.d to turn into a multi-bagger.

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. Despite the concerning underlying trends, the stock has actually gained 15% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a separate note, we've found 1 warning sign for Koncar - Elektroindustrija d.d you'll probably want to know about.

While Koncar - Elektroindustrija d.d 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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