ERG Spólka Akcyjna (WSE:ERG) Could Be At Risk Of Shrinking As A Company

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at ERG Spólka Akcyjna (WSE:ERG), so let's see why.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for ERG Spólka Akcyjna:

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

0.035 = zł1.6m ÷ (zł76m - zł29m) (Based on the trailing twelve months to December 2021).

Therefore, ERG Spólka Akcyjna has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 13%.

View our latest analysis for ERG Spólka Akcyjna

Historical performance is a great place to start when researching a stock so above you can see the gauge for ERG Spólka Akcyjna's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of ERG Spólka Akcyjna, check out these free graphs here.

The Trend Of ROCE

There is reason to be cautious about ERG Spólka Akcyjna, given the returns are trending downwards. To be more specific, the ROCE was 9.8% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 ERG Spólka Akcyjna becoming one if things continue as they have.

The Key Takeaway

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 11% 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 want to know some of the risks facing ERG Spólka Akcyjna we've found 4 warning signs (2 can't be ignored!) that you should be aware of before investing here.

While ERG Spólka Akcyjna 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. 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.