What underlying fundamental trends can indicate that a company might be 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. 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 Allane (FRA:LNSX), so let's see why.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Allane is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = €18m ÷ (€1.2b - €409m) (Based on the trailing twelve months to September 2022).
So, Allane has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Transportation industry average of 7.2%.
Check out our latest analysis for Allane
In the above chart we have measured Allane's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Does the ROCE Trend For Allane Tell Us?
There is reason to be cautious about Allane, given the returns are trending downwards. About five years ago, returns on capital were 6.4%, 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. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Allane becoming one if things continue as they have.
Our Take On Allane's ROCE
In summary, it's unfortunate that Allane is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 33% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
On a separate note, we've found 1 warning sign for Allane you'll probably want to know about.
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