Semapa - Sociedade de Investimento e Gestão SGPS (ELI:SEM) Will Be Looking To Turn Around Its Returns

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. So after we looked into Semapa - Sociedade de Investimento e Gestão SGPS (ELI:SEM), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Semapa - Sociedade de Investimento e Gestão SGPS, this is the formula:

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

0.058 = €162m ÷ (€3.8b - €1.0b) (Based on the trailing twelve months to December 2020).

So, Semapa - Sociedade de Investimento e Gestão SGPS has an ROCE of 5.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.8%.

See 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'd like, you can check out the forecasts from the analysts covering Semapa - Sociedade de Investimento e Gestão SGPS here for free.

So How Is Semapa - Sociedade de Investimento e Gestão SGPS' ROCE Trending?

There is reason to be cautious about Semapa - Sociedade de Investimento e Gestão SGPS, given the returns are trending downwards. About five years ago, returns on capital were 9.5%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Semapa - Sociedade de Investimento e Gestão SGPS to turn into a multi-bagger.

What We Can Learn From Semapa - Sociedade de Investimento e Gestão SGPS' 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. In spite of that, the stock has delivered a 21% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing: We've identified 5 warning signs with Semapa - Sociedade de Investimento e Gestão SGPS (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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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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