SC Romcab (BVB:MCAB) Will Be Hoping To Turn Its Returns On Capital Around

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. Having said that, after a brief look, SC Romcab (BVB:MCAB) we aren't filled with optimism, but let's investigate further.

What is 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. Analysts use this formula to calculate it for SC Romcab:

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

0.0059 = RON1.3m ÷ (RON423m - RON203m) (Based on the trailing twelve months to September 2021).

So, SC Romcab has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 12%.

Check out our latest analysis for SC Romcab

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

What Can We Tell From SC Romcab's ROCE Trend?

The trend of returns that SC Romcab is generating are raising some concerns. The company used to generate 32% on its capital five years ago but it has since fallen noticeably. In addition to that, SC Romcab is now employing 21% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a related note, SC Romcab has decreased its current liabilities to 48% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Key Takeaway

To see SC Romcab reducing the capital employed in the business in tandem with diminishing returns, is concerning. In spite of that, the stock has delivered a 0.2% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about SC Romcab, we've spotted 3 warning signs, and 1 of them is potentially serious.

While SC Romcab 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.