If we’re looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we’ll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, ElringKlinger (ETR:ZIL2) we aren’t filled with optimism, but let’s investigate further.
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. The formula for this calculation on ElringKlinger is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.0064 = €7.9m ÷ (€1.8b – €576m) (Based on the trailing twelve months to March 2025).
Therefore, ElringKlinger has an ROCE of 0.6%. Ultimately, that’s a low return and it under-performs the Auto Components industry average of 10%.
Check out our latest analysis for ElringKlinger
In the above chart we have measured ElringKlinger’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering ElringKlinger for free.
The trend of returns that ElringKlinger is generating are raising some concerns. To be more specific, today’s ROCE was 3.3% five years ago but has since fallen to 0.6%. On top of that, the business is utilizing 26% 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.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 32%, which has impacted the ROCE. If current liabilities hadn’t increased as much as they did, the ROCE could actually be even lower. While the ratio isn’t currently too high, it’s worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
In summary, it’s unfortunate that ElringKlinger is shrinking its capital base and also generating lower returns. Investors haven’t taken kindly to these developments, since the stock has declined 18% from where it was five years ago. With underlying trends that aren’t great in these areas, we’d consider looking elsewhere.
Like most companies, ElringKlinger does come with some risks, and we’ve found 2 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.