When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into KROMI Logistik (ETR:K1R), the trends above didn't look too great.
What Is Return On Capital Employed (ROCE)?
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 KROMI Logistik:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = €714k ÷ (€37m - €12m) (Based on the trailing twelve months to December 2022).
Therefore, KROMI Logistik has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 16%.
View our latest analysis for KROMI Logistik
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of KROMI Logistik, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about KROMI Logistik, given the returns are trending downwards. To be more specific, the ROCE was 5.9% five years ago, but since then it has dropped noticeably. 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. If these trends continue, we wouldn't expect KROMI Logistik to turn into a multi-bagger.
On a related note, KROMI Logistik has decreased its current liabilities to 32% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
What We Can Learn From KROMI Logistik's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 26% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.