Caffyns (LON:CFYN) May Have Issues Allocating Its Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both on capital employed (ROCE) declining and this usually coincides with a decreasing of capital employed. 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 ( ), we weren't too hopeful.

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Caffyns: 0.022 = UK£1.



1m ÷ (UK£100m - UK£48m) . Therefore, Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 9.8%.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Caffyns' ROCE against it's prior returns. If you're interested in investigating Caffyns' past further, check out this . We are a bit worried about the trend of returns on capital at Caffyns.

About five years ago, returns on capital were 3.9%, 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.

Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Caffyns to turn into a multi-bagger. On a separate but related note, it's important to know that Caffyns has a current liabilities to total assets ratio of 48%, which we'd consider pretty high.

This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks. In summary, it's unfortunate that Caffyns is generating lower returns from the same amount of capital.

Despite the concerning underlying trends, the stock has actually gained 31% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere. If you want to know some of the risks facing Caffyns we've found (2 are significant!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this.