If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Ascom Holding (VTX:ASCN), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What Is It?
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 Ascom Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = CHF9.0m ÷ (CHF178m - CHF86m) (Based on the trailing twelve months to June 2022).
Thus, Ascom Holding has an ROCE of 9.7%. In absolute terms, that's a low return but it's around the Healthcare Services industry average of 11%.
See our latest analysis for Ascom Holding
In the above chart we have measured Ascom Holding's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
In terms of Ascom Holding's historical ROCE trend, it isn't fantastic. The company used to generate 12% on its capital five years ago but it has since fallen noticeably. In addition to that, Ascom Holding is now employing 24% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.
On a side note, Ascom Holding's current liabilities are still rather high at 48% of total assets. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
In Conclusion...
In summary, it's unfortunate that Ascom Holding is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 65% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.