Wawel (WSE:WWL) Could Be At Risk Of Shrinking As A Company

What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Wawel (WSE:WWL), 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. The formula for this calculation on Wawel is:

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

0.10 = zł69m ÷ (zł769m - zł82m) (Based on the trailing twelve months to September 2023).

Thus, Wawel has an ROCE of 10%. In absolute terms, that's a pretty standard return but compared to the Food industry average it falls behind.

View our latest analysis for Wawel

Above you can see how the current ROCE for Wawel compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Wawel .

What Can We Tell From Wawel's ROCE Trend?

There is reason to be cautious about Wawel, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 15% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Wawel becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Wawel is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 20% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you're still interested in Wawel it's worth checking out our FREE intrinsic value approximation for WWL to see if it's trading at an attractive price in other respects.

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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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.