Returns On Capital Signal Difficult Times Ahead For Belon (MCX:BLNG)

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Belon (MCX:BLNG), the trends above didn't look too great.

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. The formula for this calculation on Belon is:

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

0.0014 = ₽7.8m ÷ (₽5.6b - ₽1.3m) (Based on the trailing twelve months to June 2020).

Thus, Belon has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 12%.

See our latest analysis for Belon

Historical performance is a great place to start when researching a stock so above you can see the gauge for Belon's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Belon, check out these free graphs here.

What Can We Tell From Belon's ROCE Trend?

The trend of ROCE at Belon is showing some signs of weakness. The company used to generate 11% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 35% over that same period. 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 side note, Belon has done well to pay down its current liabilities to 0.02% 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.

Our Take On Belon's ROCE

To see Belon reducing the capital employed in the business in tandem with diminishing returns, is concerning. However the stock has delivered a 62% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 2 warning signs we've spotted with Belon (including 1 which can't be ignored) .

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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