What Aqua Spólka Akcyjna's (WSE:AQU) Returns On Capital Can Tell Us

When researching a stock for investment, what can tell us that the company is in decline? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Aqua Spólka Akcyjna (WSE:AQU), we've spotted some signs that it could be struggling, so let's investigate.

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

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)

0.019 = zł7.3m ÷ (zł476m - zł93m) (Based on the trailing twelve months to September 2020).

Thus, Aqua Spólka Akcyjna has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 5.2%.

View our latest analysis for Aqua Spólka Akcyjna

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 want to delve into the historical earnings, revenue and cash flow of Aqua Spólka Akcyjna, check out these free graphs here.

What Can We Tell From Aqua Spólka Akcyjna's ROCE Trend?

We are a bit anxious about the trends of ROCE at Aqua Spólka Akcyjna. Unfortunately, returns have declined substantially over the last five years to the 1.9% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 21% 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, Aqua Spólka Akcyjna's current liabilities have increased over the last five years to 19% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. 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.

What We Can Learn From Aqua Spólka Akcyjna's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Yet despite these concerning fundamentals, the stock has performed strongly with a 58% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

If you'd like to know more about Aqua Spólka Akcyjna, we've spotted 4 warning signs, and 1 of them is concerning.

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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