LEWAG Holding (FRA:KGR) Will Be Looking To Turn Around Its Returns
In This Article:
What financial metrics can indicate to us that a company is maturing or even in decline? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at LEWAG Holding (FRA:KGR), so let's see why.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for LEWAG Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = €5.4m ÷ (€120m - €74m) (Based on the trailing twelve months to December 2023).
Thus, LEWAG Holding has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Machinery industry.
Check out our latest analysis for LEWAG Holding
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'd like to look at how LEWAG Holding has performed in the past in other metrics, you can view this free graph of LEWAG Holding's past earnings, revenue and cash flow.
What Can We Tell From LEWAG Holding's ROCE Trend?
We are a bit worried about the trend of returns on capital at LEWAG Holding. About five years ago, returns on capital were 16%, 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. 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. If these trends continue, we wouldn't expect LEWAG Holding to turn into a multi-bagger.
Advertisement: High Yield Savings Offers
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 61%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.