If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within KBS Fashion Group (NASDAQ:KBSF), we weren't too hopeful.
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. Analysts use this formula to calculate it for KBS Fashion Group:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0063 = US$341k ÷ (US$61m - US$6.6m) (Based on the trailing twelve months to December 2019).
Thus, KBS Fashion Group has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 11%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for KBS Fashion Group's ROCE against it's prior returns. If you're interested in investigating KBS Fashion Group's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From KBS Fashion Group's ROCE Trend?
The trend of returns that KBS Fashion Group is generating are raising some concerns. To be more specific, today's ROCE was 5.3% five years ago but has since fallen to 0.6%. What's equally concerning is that the amount of capital deployed in the business has shrunk by 48% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. 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.
The Bottom Line
In summary, it's unfortunate that KBS Fashion Group is shrinking its capital base and also generating lower returns. Unsurprisingly then, the stock has dived 96% over the last five years, so investors are recognizing these changes and don't like the company's prospects. Unless these trends revert to a more positive trajectory, we would look elsewhere.
On a final note, we found 3 warning signs for KBS Fashion Group (2 are a bit unpleasant) you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. 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.
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