Yahoo Finance Be Wary Of AIREA (LON:AIEA) And Its Returns On Capital
What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into AIREA (LON:AIEA), the trends above didn't look too great.
Understanding 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. Analysts use this formula to calculate it for AIREA:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = UK£1.1m ÷ (UK£25m - UK£4.7m) (Based on the trailing twelve months to June 2022).
Thus, AIREA has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 13%.
View our latest analysis for AIREA
Historical performance is a great place to start when researching a stock so above you can see the gauge for AIREA's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of AIREA, check out these free graphs here.
The Trend Of ROCE
There is reason to be cautious about AIREA, given the returns are trending downwards. About five years ago, returns on capital were 6.7%, however they're now substantially lower than that as we saw above. 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 AIREA to turn into a multi-bagger.
The Bottom Line
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 36% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
On a final note, we found 4 warning signs for AIREA (1 shouldn't be ignored) you should be aware of.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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