Returns On Capital At Fresenius SE KGaA (ETR:FRE) Paint A Concerning Picture

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Fresenius SE KGaA (ETR:FRE), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Fresenius SE KGaA, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.038 = €1.3b ÷ (€44b - €9.2b) (Based on the trailing twelve months to June 2024).

Therefore, Fresenius SE KGaA has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 5.4%.

View our latest analysis for Fresenius SE KGaA

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Above you can see how the current ROCE for Fresenius SE KGaA compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Fresenius SE KGaA .

So How Is Fresenius SE KGaA's ROCE Trending?

The trend of ROCE at Fresenius SE KGaA is showing some signs of weakness. The company used to generate 8.6% on its capital five years ago but it has since fallen noticeably. In addition to that, Fresenius SE KGaA is now employing 33% less capital than it was five years ago. 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. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line

In summary, it's unfortunate that Fresenius SE KGaA is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 18% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Fresenius SE KGaA does have some risks though, and we've spotted 1 warning sign for Fresenius SE KGaA that you might be interested in.

While Fresenius SE KGaA isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.