Some Investors May Be Worried About Farminveste S.G.P.S' (ELI:MLFMV) Returns On Capital

When researching a stock for investment, what can tell us that the company is 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Farminveste S.G.P.S (ELI:MLFMV), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for Farminveste S.G.P.S, this is the formula:

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

0.05 = €18m ÷ (€627m - €262m) (Based on the trailing twelve months to December 2022).

Therefore, Farminveste S.G.P.S has an ROCE of 5.0%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 8.6%.

View our latest analysis for Farminveste S.G.P.S

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're interested in investigating Farminveste S.G.P.S' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Farminveste S.G.P.S' ROCE Trending?

We are a bit worried about the trend of returns on capital at Farminveste S.G.P.S. About five years ago, returns on capital were 7.2%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Farminveste S.G.P.S to turn into a multi-bagger.

On a side note, Farminveste S.G.P.S' current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Farminveste S.G.P.S' ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. This could explain why the stock has sunk a total of 71% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Farminveste S.G.P.S, we've spotted 4 warning signs, and 2 of them are a bit unpleasant.

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.