When it comes to investment, there are some useful financial indicators that can raise warning signs when a business is potentially in trouble. Mature businesses often show signs of ageing when we see a simultaneous decline in return on invested capital (ROCE) and a shrinking invested capital base. This combination indicates that not only is the company investing less, but it is also seeing a decline in returns on the amount invested. So when we looked into Sligro Food Group (AMS:SLIGR), the trends above didn’t look very good.
What is Return on Invested Capital (ROCE)?
For those unsure of what ROCE is, it measures the amount of pre-tax profit a company is able to generate from the capital employed in its business. Here’s the formula for this calculation for Sligro Food Group:
Return on Invested Capital = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)
0.035 = €27m ÷ (€1.5b – €712m) (Based on the trailing twelve months to December 2023).
So Sligro Food Group has an ROCE of 3.5%. In absolute terms, this is a low return, below the Consumer Retail industry average of 11%.
View our latest analysis for Sligro Food Group
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Above we can see how Sligro Food Group’s current ROCE compares to its prior returns on capital, but the history can only tell us so much, and if you’re interested you can see analyst forecasts in this free analyst report on Sligro Food Group.
What can we learn from ROCE trends?
We are a bit concerned about the trend in Sligro Food Group’s return on capital. Unfortunately, return on capital is down from 7.3% five years ago. Meanwhile, capital deployed in the business has remained roughly flat over the period. This combination could be a sign of a mature business that still has areas to deploy capital, but with new competitors and declining profit margins, the returns gained are not as high. If these trends continue, we would not expect Sligro Food Group to turn into a multi-bagger.
Incidentally, we notice that the current liabilities to total assets ratio has risen to 48%, impacting the ROCE. Without this increase, the ROCE could be even lower than 3.5%. This means that in reality, a significantly larger portion of the business is funded by the company’s suppliers, short-term creditors, etc., which may pose risks in itself.
Conclusion on Srigro Food Group’s ROCE
Overall, lower returns from the same capital input is not a sign of a compounding machine. Therefore, it is not surprising that the share price has fallen 56% over the past five years. Investors seem to be aware of these changes. The underlying trends in these areas are not good, so we recommend looking elsewhere.
The story continues
Finally, we’ve spotted 2 warning signs for Sligro Food Group you should be aware of.
While Sligro Food Group doesn’t have the highest profit margins, check out this free list of companies with rock-solid balance sheets and high returns on equity.
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This article by Simply Wall St is of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell a stock, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
