Be Wary Of Conduril - Engenharia (ELI:CDU) And Its Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Conduril - Engenharia (ELI:CDU), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Conduril - Engenharia, this is the formula:

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

0.036 = €9.5m ÷ (€387m - €123m) (Based on the trailing twelve months to December 2022).

Therefore, Conduril - Engenharia has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 10%.

View our latest analysis for Conduril - Engenharia

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Conduril - Engenharia has performed in the past in other metrics, you can view this free graph of Conduril - Engenharia's past earnings, revenue and cash flow.

What Can We Tell From Conduril - Engenharia's ROCE Trend?

We are a bit worried about the trend of returns on capital at Conduril - Engenharia. To be more specific, the ROCE was 6.0% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Conduril - Engenharia to turn into a multi-bagger.

What We Can Learn From Conduril - Engenharia's ROCE

In summary, it's unfortunate that Conduril - Engenharia is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 37% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Conduril - Engenharia does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those shouldn't be ignored...

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. 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.