Lumi Gruppen (OB:LUMI) May Have Issues Allocating Its Capital

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount 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 Lumi Gruppen (OB:LUMI), 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. Analysts use this formula to calculate it for Lumi Gruppen:

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

0.041 = kr35m ÷ (kr1.0b - kr155m) (Based on the trailing twelve months to December 2023).

Thus, Lumi Gruppen has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 13%.

See our latest analysis for Lumi Gruppen

Above you can see how the current ROCE for Lumi Gruppen compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Lumi Gruppen .

What Can We Tell From Lumi Gruppen's ROCE Trend?

In terms of Lumi Gruppen's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 6.1% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Lumi Gruppen to turn into a multi-bagger.

What We Can Learn From Lumi Gruppen's ROCE

In summary, it's unfortunate that Lumi Gruppen is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 80% during the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Lumi Gruppen does come with some risks, and we've found 3 warning signs that you should be aware of.

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. 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.