S.C. Santierul Naval Orsova (BVB:SNO) Will Be Hoping To Turn Its Returns On Capital Around

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at S.C. Santierul Naval Orsova (BVB:SNO), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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. To calculate this metric for S.C. Santierul Naval Orsova, this is the formula:

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

0.0016 = RON147k ÷ (RON104m - RON15m) (Based on the trailing twelve months to September 2021).

Thus, S.C. Santierul Naval Orsova has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 1.0%.

Check out our latest analysis for S.C. Santierul Naval Orsova

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how S.C. Santierul Naval Orsova has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For S.C. Santierul Naval Orsova Tell Us?

There is reason to be cautious about S.C. Santierul Naval Orsova, given the returns are trending downwards. About five years ago, returns on capital were 4.1%, however they're now substantially lower than that as we saw above. 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 S.C. Santierul Naval Orsova to turn into a multi-bagger.

Our Take On S.C. Santierul Naval Orsova's 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. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 226%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing, we've spotted 4 warning signs facing S.C. Santierul Naval Orsova that you might find interesting.

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.