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 the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Brodogradiliste Viktor Lenac d.d (ZGSE:VLEN), so let's see why.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Brodogradiliste Viktor Lenac d.d, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = Kn18m ÷ (Kn386m - Kn66m) (Based on the trailing twelve months to March 2021).
Thus, Brodogradiliste Viktor Lenac d.d has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.7%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Brodogradiliste Viktor Lenac d.d's ROCE against it's prior returns. If you'd like to look at how Brodogradiliste Viktor Lenac d.d has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Brodogradiliste Viktor Lenac d.d's ROCE Trending?
In terms of Brodogradiliste Viktor Lenac d.d's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 12% 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. 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 Brodogradiliste Viktor Lenac d.d becoming one if things continue as they have.
Our Take On Brodogradiliste Viktor Lenac d.d's ROCE
In summary, it's unfortunate that Brodogradiliste Viktor Lenac d.d is generating lower returns from the same amount of capital. However the stock has delivered a 73% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.
If you'd like to know about the risks facing Brodogradiliste Viktor Lenac d.d, we've discovered 3 warning signs that you should be aware of.
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