These Metrics Don't Make Fabryka Obrabiarek RAFAMET (WSE:RAF) Look Too Strong

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. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Fabryka Obrabiarek RAFAMET (WSE:RAF) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Fabryka Obrabiarek RAFAMET is:

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

0.024 = zł2.9m ÷ (zł208m - zł87m) (Based on the trailing twelve months to September 2020).

So, Fabryka Obrabiarek RAFAMET has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Machinery industry average of 7.9%.

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.

What Does the ROCE Trend For Fabryka Obrabiarek RAFAMET Tell Us?

There is reason to be cautious about Fabryka Obrabiarek RAFAMET, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 4.1% that they were earning five years ago. 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. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 42%, which has impacted the ROCE. 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.

What We Can Learn From Fabryka Obrabiarek RAFAMET'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. Investors must expect better things on the horizon though because the stock has risen 17% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Fabryka Obrabiarek RAFAMET does have some risks, we noticed 4 warning signs (and 2 which are concerning) we think you should know about.

While Fabryka Obrabiarek RAFAMET may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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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