Investors Could Be Concerned With Giorgio Fedon & Figli's (BIT:FED) Returns On Capital

What underlying fundamental trends can indicate that a company might be 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Giorgio Fedon & Figli (BIT:FED), we weren't too hopeful.

Understanding 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. 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)

0.021 = €722k ÷ (€55m - €20m) (Based on the trailing twelve months to December 2020).

Therefore, Giorgio Fedon & Figli has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Luxury industry average of 4.8%.

View 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.

How Are Returns Trending?

In terms of Giorgio Fedon & Figli's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.9% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Giorgio Fedon & Figli becoming one if things continue as they have.

What We Can Learn From Giorgio Fedon & Figli's ROCE

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. Investors haven't taken kindly to these developments, since the stock has declined 46% 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.

If you want to know some of the risks facing Giorgio Fedon & Figli we've found 3 warning signs (1 is potentially serious!) that you should be aware of before investing here.

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.

When trading Giorgio Fedon & Figli or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.