Returns On Capital Signal Difficult Times Ahead For Fabryka Obrabiarek RAFAMET (WSE:RAF)

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Fabryka Obrabiarek RAFAMET (WSE:RAF) we aren't filled with optimism, but let's investigate further.

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 Fabryka Obrabiarek RAFAMET:

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

0.0033 = zł375k ÷ (zł203m - zł90m) (Based on the trailing twelve months to June 2021).

So, Fabryka Obrabiarek RAFAMET has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.4%.

Check out 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 want to delve into the historical earnings, revenue and cash flow of Fabryka Obrabiarek RAFAMET, check out these free graphs here.

How Are Returns Trending?

In terms of Fabryka Obrabiarek RAFAMET's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.9% five years ago, but since then it has dropped noticeably. 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 Fabryka Obrabiarek RAFAMET becoming one if things continue as they have.

Another thing to note, Fabryka Obrabiarek RAFAMET has a high ratio of current liabilities to total assets of 44%. 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.

The Bottom Line

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. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Fabryka Obrabiarek RAFAMET (of which 2 are significant!) that you should know about.

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.

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.

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