Capital Allocation Trends At Elektro Maribor d.d (LJSE:EMAG) Aren't Ideal

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Elektro Maribor d.d (LJSE:EMAG), so let's see why.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Elektro Maribor d.d, this is the formula:

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

0.029 = €12m ÷ (€449m - €51m) (Based on the trailing twelve months to December 2021).

Thus, Elektro Maribor d.d has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Electric Utilities industry average of 8.4%.

View our latest analysis for Elektro Maribor d.d

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

What Can We Tell From Elektro Maribor d.d's ROCE Trend?

There is reason to be cautious about Elektro Maribor d.d, given the returns are trending downwards. To be more specific, the ROCE was 5.0% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Elektro Maribor d.d becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Elektro Maribor d.d is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last three years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Elektro Maribor d.d does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

While Elektro Maribor d.d 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.