Does Arteria's (WSE:ARR) Returns On Capital Reflect Well On The Business?

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Arteria (WSE:ARR), the trends above didn't look too great.

What is 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 Arteria, this is the formula:

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

0.0034 = zł162k ÷ (zł111m - zł63m) (Based on the trailing twelve months to September 2020).

So, Arteria has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Media industry average of 16%.

Check out our latest analysis for Arteria

Historical performance is a great place to start when researching a stock so above you can see the gauge for Arteria's ROCE against it's prior returns. If you're interested in investigating Arteria's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Arteria's ROCE Trending?

In terms of Arteria's historical ROCE trend, it isn't fantastic. The company used to generate 12% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 56% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Arteria's current liabilities have increased over the last five years to 56% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.3%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Arteria's ROCE

In summary, it's unfortunate that Arteria is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 54% 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.

One final note, you should learn about the 3 warning signs we've spotted with Arteria (including 2 which are significant) .

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. 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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