Elektro Gorenjska d. d (LJSE:EGKG) Has Some Difficulty Using Its Capital Effectively

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Elektro Gorenjska d. d (LJSE:EGKG), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Elektro Gorenjska d. d:

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

0.03 = €7.0m ÷ (€245m - €15m) (Based on the trailing twelve months to December 2020).

Thus, Elektro Gorenjska d. d has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 6.2%.

See our latest analysis for Elektro Gorenjska d. d

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

How Are Returns Trending?

In terms of Elektro Gorenjska d. d's historical ROCE movements, the trend doesn't inspire confidence. About two years ago, returns on capital were 4.3%, 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Elektro Gorenjska d. d becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Elektro Gorenjska d. d is generating lower returns from the same amount of capital.

On a final note, we found 3 warning signs for Elektro Gorenjska d. d (2 don't sit too well with us) 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.