There Are Reasons To Feel Uneasy About Auxilia's (WSE:AUX) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Auxilia (WSE:AUX), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for Auxilia, this is the formula:

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

0.016 = zł743k ÷ (zł48m - zł2.7m) (Based on the trailing twelve months to September 2021).

Thus, Auxilia has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 16%.

See our latest analysis for Auxilia

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Auxilia's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Auxilia's ROCE Trending?

When we looked at the ROCE trend at Auxilia, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Auxilia has decreased its current liabilities to 5.6% of total assets. Since the ratio used to be 70%, that's a significant reduction and it no doubt explains the drop in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Auxilia's ROCE

In summary, we're somewhat concerned by Auxilia's diminishing returns on increasing amounts of capital. This could explain why the stock has sunk a total of 90% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for Auxilia (1 is a bit concerning) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.