Consorcio ARA S. A. B. de C. V (BMV:ARA) Will Be Looking To Turn Around Its Returns

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. 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. So after glancing at the trends within Consorcio ARA S. A. B. de C. V (BMV:ARA), we weren't too hopeful.

What Is 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. Analysts use this formula to calculate it for Consorcio ARA S. A. B. de C. V:

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

0.033 = Mex$641m ÷ (Mex$22b - Mex$2.1b) (Based on the trailing twelve months to September 2022).

Thus, Consorcio ARA S. A. B. de C. V has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 6.7%.

See our latest analysis for Consorcio ARA S. A. B. de C. V

In the above chart we have measured Consorcio ARA S. A. B. de C. V's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Consorcio ARA S. A. B. de C. V here for free.

What Does the ROCE Trend For Consorcio ARA S. A. B. de C. V Tell Us?

In terms of Consorcio ARA S. A. B. de C. V's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 6.0% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Consorcio ARA S. A. B. de C. V becoming one if things continue as they have.

The Bottom Line On Consorcio ARA S. A. B. de C. V's ROCE

In summary, it's unfortunate that Consorcio ARA S. A. B. de C. V is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 45% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing to note, we've identified 1 warning sign with Consorcio ARA S. A. B. de C. V and understanding it should be part of your investment process.

While Consorcio ARA S. A. B. de C. V 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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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.