These Return Metrics Don't Make Farminveste S.G.P.S (ELI:MLFMV) Look Too Strong

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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Farminveste S.G.P.S (ELI:MLFMV) we aren't filled with optimism, but let's investigate further.

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)

0.031 = €9.1m ÷ (€600m - €302m) (Based on the trailing twelve months to June 2021).

Therefore, Farminveste S.G.P.S has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 9.1%.

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

Historical performance is a great place to start when researching a stock so above you can see the gauge for Farminveste S.G.P.S' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Farminveste S.G.P.S, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Farminveste S.G.P.S' historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.7% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Farminveste S.G.P.S becoming one if things continue as they have.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 50%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

What We Can Learn From Farminveste S.G.P.S' ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. We expect this has contributed to the stock plummeting 78% during the last three years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for Farminveste S.G.P.S (3 shouldn't be ignored) you should be aware of.

While Farminveste S.G.P.S isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.