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 indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at BEST (WSE:BST), we've spotted some signs that it could be struggling, so let's investigate.
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. The formula for this calculation on BEST is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = zł33m ÷ (zł1.1b - zł270m) (Based on the trailing twelve months to December 2021).
So, BEST has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 13%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for BEST's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of BEST, check out these free graphs here.
What Can We Tell From BEST's ROCE Trend?
We are a bit worried about the trend of returns on capital at BEST. About five years ago, returns on capital were 16%, however they're now substantially lower than that as we saw above. 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. If these trends continue, we wouldn't expect BEST to turn into a multi-bagger.
On a side note, BEST's current liabilities have increased over the last five years to 25% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 4.1%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
What We Can Learn From BEST'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. Long term shareholders who've owned the stock over the last five years have experienced a 17% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you'd like to know about the risks facing BEST, we've discovered 2 warning signs that you should be aware of.
While BEST isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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.