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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Fresenius SE KGaA (ETR:FRE), so let's see why.
What Is 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. To calculate this metric for Fresenius SE KGaA, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = €1.4b ÷ (€42b - €8.3b) (Based on the trailing twelve months to September 2024).
Thus, Fresenius SE KGaA has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 5.5%.
Check out our latest analysis for Fresenius SE KGaA
Above you can see how the current ROCE for Fresenius SE KGaA compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Fresenius SE KGaA for free.
What The Trend Of ROCE Can Tell Us
The trend of returns that Fresenius SE KGaA is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 4.2% we see today. On top of that, the business is utilizing 36% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. 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 Fresenius SE KGaA is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 16% 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.
If you'd like to know about the risks facing Fresenius SE KGaA, we've discovered 1 warning sign that you should be aware of.