Fabryka Obrabiarek RAFAMET (WSE:RAF) Is Finding It Tricky To Allocate 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Fabryka Obrabiarek RAFAMET (WSE:RAF), so let's see why.

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

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 Fabryka Obrabiarek RAFAMET:

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

0.0064 = zł769k ÷ (zł201m - zł81m) (Based on the trailing twelve months to December 2020).

Therefore, Fabryka Obrabiarek RAFAMET has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 7.3%.

See our latest analysis for Fabryka Obrabiarek RAFAMET

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fabryka Obrabiarek RAFAMET's ROCE against it's prior returns. If you'd like to look at how Fabryka Obrabiarek RAFAMET has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Fabryka Obrabiarek RAFAMET's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 4.5%, 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Fabryka Obrabiarek RAFAMET becoming one if things continue as they have.

On a side note, Fabryka Obrabiarek RAFAMET's current liabilities have increased over the last five years to 40% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On Fabryka Obrabiarek RAFAMET's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 36% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Fabryka Obrabiarek RAFAMET (including 1 which shouldn't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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