Some Investors May Be Worried About Zaklady Urzadzen Komputerowych ELZAB's (WSE:ELZ) Returns On Capital

What underlying fundamental trends can indicate that a company might be in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. On that note, looking into Zaklady Urzadzen Komputerowych ELZAB (WSE:ELZ), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Zaklady Urzadzen Komputerowych ELZAB:

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

0.025 = zł1.8m ÷ (zł116m - zł44m) (Based on the trailing twelve months to December 2022).

So, Zaklady Urzadzen Komputerowych ELZAB has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Electronic industry average of 17%.

View our latest analysis for Zaklady Urzadzen Komputerowych ELZAB

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

SWOT Analysis for Zaklady Urzadzen Komputerowych ELZAB

What Can We Tell From Zaklady Urzadzen Komputerowych ELZAB's ROCE Trend?

We are a bit anxious about the trends of ROCE at Zaklady Urzadzen Komputerowych ELZAB. To be more specific, today's ROCE was 7.7% five years ago but has since fallen to 2.5%. In addition to that, Zaklady Urzadzen Komputerowych ELZAB is now employing 21% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. 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, Zaklady Urzadzen Komputerowych ELZAB has done well to pay down its current liabilities to 38% of total assets. That could partly explain why the ROCE has dropped. 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.

The Key Takeaway

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Unsurprisingly then, the stock has dived 84% over the last five years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching Zaklady Urzadzen Komputerowych ELZAB, you might be interested to know about the 3 warning signs that our analysis has discovered.

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.