Capital Allocation Trends At Giorgio Fedon & Figli (BIT:FED) Aren't Ideal

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Giorgio Fedon & Figli (BIT:FED), so let's see why.

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 Giorgio Fedon & Figli, this is the formula:

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

0.041 = €1.3m ÷ (€54m - €21m) (Based on the trailing twelve months to June 2021).

So, Giorgio Fedon & Figli has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Luxury industry average of 8.3%.

See our latest analysis for Giorgio Fedon & Figli

Historical performance is a great place to start when researching a stock so above you can see the gauge for Giorgio Fedon & Figli's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Giorgio Fedon & Figli, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Giorgio Fedon & Figli's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 6.9% 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. 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 Giorgio Fedon & Figli to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Giorgio Fedon & Figli is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 40% 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.

On a final note, we found 2 warning signs for Giorgio Fedon & Figli (1 shouldn't be ignored) you should be aware of.

While Giorgio Fedon & Figli 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.

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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.