Returns On Capital At Icelandic Salmon (OB:ISLAX) Paint A Concerning Picture

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. So after glancing at the trends within Icelandic Salmon (OB:ISLAX), 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. Analysts use this formula to calculate it for Icelandic Salmon:

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

0.027 = €2.9m ÷ (€144m - €34m) (Based on the trailing twelve months to December 2020).

Therefore, Icelandic Salmon has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Food industry average of 6.1%.

View our latest analysis for Icelandic Salmon

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Icelandic Salmon, check out these free graphs here.

What Does the ROCE Trend For Icelandic Salmon Tell Us?

There is reason to be cautious about Icelandic Salmon, given the returns are trending downwards. About one year ago, returns on capital were 4.4%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Icelandic Salmon to turn into a multi-bagger.

Our Take On Icelandic Salmon'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. However the stock has delivered a 26% return to shareholders over the last year, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we found 3 warning signs for Icelandic Salmon (1 is significant) 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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