Returns On Capital At Sonae Indústria S.G.P.S (ELI:SONI) Paint A Concerning Picture

By
Simply Wall St
Published
January 21, 2021
Source: Shutterstock

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Sonae Indústria S.G.P.S (ELI:SONI), the trends above didn't look too great.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Sonae Indústria S.G.P.S is:

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

0.0025 = €879k ÷ (€408m - €52m) (Based on the trailing twelve months to June 2020).

So, Sonae Indústria S.G.P.S has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 5.7%.

View our latest analysis for Sonae Indústria S.G.P.S

roce
ENXTLS:SONI Return on Capital Employed January 22nd 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sonae Indústria S.G.P.S' ROCE against it's prior returns. If you're interested in investigating Sonae Indústria S.G.P.S' past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Sonae Indústria S.G.P.S' ROCE Trend?

We are a bit anxious about the trends of ROCE at Sonae Indústria S.G.P.S. To be more specific, today's ROCE was 4.5% five years ago but has since fallen to 0.2%. On top of that, the business is utilizing 47% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a related note, Sonae Indústria S.G.P.S has decreased its current liabilities to 13% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Sonae Indústria S.G.P.S' ROCE

In summary, it's unfortunate that Sonae Indústria S.G.P.S is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 17% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Sonae Indústria S.G.P.S (including 1 which is potentially serious) .

While Sonae Indústria 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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