Here's What's Concerning About Losinjska Plovidba Holding d.d (ZGSE:LPLH)

What underlying fundamental trends can indicate that a company might be 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Losinjska Plovidba Holding d.d (ZGSE:LPLH), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for Losinjska Plovidba Holding d.d, this is the formula:

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

0.0053 = Kn1.0m ÷ (Kn210m - Kn19m) (Based on the trailing twelve months to September 2020).

So, Losinjska Plovidba Holding d.d has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 5.4%.

View our latest analysis for Losinjska Plovidba Holding d.d

Historical performance is a great place to start when researching a stock so above you can see the gauge for Losinjska Plovidba Holding d.d's ROCE against it's prior returns. If you'd like to look at how Losinjska Plovidba Holding 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 Losinjska Plovidba Holding d.d's ROCE Trending?

There is reason to be cautious about Losinjska Plovidba Holding d.d, given the returns are trending downwards. To be more specific, the ROCE was 2.9% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Losinjska Plovidba Holding d.d becoming one if things continue as they have.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 35% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Losinjska Plovidba Holding d.d does have some risks though, and we've spotted 1 warning sign for Losinjska Plovidba Holding d.d that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. 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.
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