Elektrotim (WSE:ELT) Will Be Hoping To Turn Its Returns On Capital Around

When researching a stock for investment, what can tell us that the company is in decline? 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Elektrotim (WSE:ELT), the trends above didn't look too great.

Return On Capital Employed (ROCE): What is it?

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 Elektrotim:

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

0.11 = zł8.4m ÷ (zł140m - zł63m) (Based on the trailing twelve months to September 2020).

Therefore, Elektrotim has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Electrical industry.

See our latest analysis for Elektrotim

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

What Does the ROCE Trend For Elektrotim Tell Us?

In terms of Elektrotim's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 19% 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. If these trends continue, we wouldn't expect Elektrotim to turn into a multi-bagger.

On a separate but related note, it's important to know that Elektrotim has a current liabilities to total assets ratio of 45%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Elektrotim's ROCE

In summary, it's unfortunate that Elektrotim is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 48% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about Elektrotim, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

While Elektrotim 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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