Impresa - Sociedade Gestora de Participações Sociais (ELI:IPR) Could Be At Risk Of Shrinking As A Company

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. And from a first read, things don't look too good at Impresa - Sociedade Gestora de Participações Sociais (ELI:IPR), so let's see why.

What Is 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 Impresa - Sociedade Gestora de Participações Sociais, this is the formula:

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

0.042 = €11m ÷ (€384m - €128m) (Based on the trailing twelve months to June 2023).

So, Impresa - Sociedade Gestora de Participações Sociais has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Media industry average of 10%.

View our latest analysis for Impresa - Sociedade Gestora de Participações Sociais

Historical performance is a great place to start when researching a stock so above you can see the gauge for Impresa - Sociedade Gestora de Participações Sociais' ROCE against it's prior returns. If you're interested in investigating Impresa - Sociedade Gestora de Participações Sociais' past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Impresa - Sociedade Gestora de Participações Sociais. Unfortunately the returns on capital have diminished from the 6.3% that they were earning five years ago. 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. If these trends continue, we wouldn't expect Impresa - Sociedade Gestora de Participações Sociais to turn into a multi-bagger.

What We Can Learn From Impresa - Sociedade Gestora de Participações Sociais' ROCE

In summary, it's unfortunate that Impresa - Sociedade Gestora de Participações Sociais is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 6.7% in 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.

On a final note, we found 2 warning signs for Impresa - Sociedade Gestora de Participações Sociais (1 makes us a bit uncomfortable) you should be aware of.

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.