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. Having said that, after a brief look, BAUER (ETR:B5A) we aren't filled with optimism, but let's investigate further.
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. To calculate this metric for BAUER, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0098 = €8.8m ÷ (€1.7b - €807m) (Based on the trailing twelve months to March 2023).
So, BAUER has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the Construction industry average of 10%.
View our latest analysis for BAUER
Above you can see how the current ROCE for BAUER compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
There is reason to be cautious about BAUER, given the returns are trending downwards. To be more specific, the ROCE was 8.0% 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. 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 BAUER to turn into a multi-bagger.
On a side note, BAUER's current liabilities are still rather high at 47% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line
In summary, it's unfortunate that BAUER is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 72% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.