Yahoo Finance Traumhaus (ETR:TRU) Could Be Struggling To Allocate Capital
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Traumhaus (ETR:TRU) and its ROCE trend, we weren't exactly thrilled.
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. Analysts use this formula to calculate it for Traumhaus:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = €3.8m ÷ (€154m - €54m) (Based on the trailing twelve months to December 2022).
Therefore, Traumhaus has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 6.3%.
View our latest analysis for Traumhaus
In the above chart we have measured Traumhaus' 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 Traumhaus here for free.
What Can We Tell From Traumhaus' ROCE Trend?
On the surface, the trend of ROCE at Traumhaus doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 3.7%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a related note, Traumhaus has decreased its current liabilities to 35% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
The Bottom Line On Traumhaus' ROCE
From the above analysis, we find it rather worrisome that returns on capital and sales for Traumhaus have fallen, meanwhile the business is employing more capital than it was five years ago. Unsurprisingly then, the stock has dived 75% over the last five years, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
One more thing: We've identified 5 warning signs with Traumhaus (at least 2 which are a bit unpleasant) , and understanding them would certainly be useful.
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.
