Is This A Sign of Things To Come At Semapa - Sociedade de Investimento e Gestão SGPS (ELI:SEM)?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Semapa - Sociedade de Investimento e Gestão SGPS (ELI:SEM), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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. Analysts use this formula to calculate it for Semapa - Sociedade de Investimento e Gestão SGPS:

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

0.053 = €152m ÷ (€4.2b - €1.3b) (Based on the trailing twelve months to September 2020).

Therefore, Semapa - Sociedade de Investimento e Gestão SGPS has an ROCE of 5.3%. On its own, that's a low figure but it's around the 5.7% average generated by the Forestry industry.

Check out our latest analysis for Semapa - Sociedade de Investimento e Gestão SGPS

In the above chart we have measured Semapa - Sociedade de Investimento e Gestão SGPS' prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Semapa - Sociedade de Investimento e Gestão SGPS. About five years ago, returns on capital were 8.9%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Semapa - Sociedade de Investimento e Gestão SGPS becoming one if things continue as they have.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Semapa - Sociedade de Investimento e Gestão SGPS (including 1 which is potentially serious) .

While Semapa - Sociedade de Investimento e Gestão SGPS 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. 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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