Aqua Spólka Akcyjna's (WSE:AQU) Returns On Capital Not Reflecting Well On The Business

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. 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 Aqua Spólka Akcyjna (WSE:AQU), so let's see why.

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. The formula for this calculation on Aqua Spólka Akcyjna is:

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

0.024 = zł9.3m ÷ (zł479m - zł95m) (Based on the trailing twelve months to June 2022).

So, Aqua Spólka Akcyjna has an ROCE of 2.4%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 3.9%.

Our analysis indicates that AQU is potentially overvalued!

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

The Trend Of ROCE

In terms of Aqua Spólka Akcyjna's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 3.1%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. If these trends continue, we wouldn't expect Aqua Spólka Akcyjna to turn into a multi-bagger.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 20%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 2.4%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 4.4% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know more about Aqua Spólka Akcyjna, we've spotted 3 warning signs, and 1 of them is significant.

While Aqua 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.