Lauritz.com Group (STO:LAUR) Could Be Struggling To Allocate Capital

When researching a stock for investment, what can tell us that the company is in decline? 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Lauritz.com Group (STO:LAUR), 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 Lauritz.com Group, this is the formula:

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

0.016 = kr.1.1m ÷ (kr.139m - kr.70m) (Based on the trailing twelve months to March 2023).

Thus, Lauritz.com Group has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 11%.

See our latest analysis for Lauritz.com Group

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 Lauritz.com Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Lauritz.com Group's ROCE Trending?

The trend of ROCE at Lauritz.com Group is showing some signs of weakness. To be more specific, today's ROCE was 2.0% five years ago but has since fallen to 1.6%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 78% over that same period. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 51%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

Our Take On Lauritz.com Group's ROCE

To see Lauritz.com Group reducing the capital employed in the business in tandem with diminishing returns, is concerning. This could explain why the stock has sunk a total of 74% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know about the risks facing Lauritz.com Group, we've discovered 4 warning signs that 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.