When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien (ETR:BVB), 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 Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien, this is the formula:

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

0.049 = €17m ÷ (€512m - €161m) (Based on the trailing twelve months to June 2023).

Thus, Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 11%.

View our latest analysis for Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien

Above you can see how the current ROCE for Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien. Unfortunately the returns on capital have diminished from the 16% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien becoming one if things continue as they have.

The Bottom Line On Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien's ROCE

In summary, it's unfortunate that Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 60% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing to note, we've identified 1 warning sign with Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien and understanding this should be part of your investment process.

While Borussia Dortmund GmbH Kommanditgesellschaft auf Aktien 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.