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. 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into CDW Holding (SGX:BXE), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

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 CDW Holding:

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

0.052 = US$3.3m ÷ (US$118m - US$54m) (Based on the trailing twelve months to December 2022).

So, CDW Holding has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 20%.

View our latest analysis for CDW Holding

Historical performance is a great place to start when researching a stock so above you can see the gauge for CDW Holding's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of CDW Holding, check out these free graphs here.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at CDW Holding. To be more specific, the ROCE was 7.5% five years ago, but since then it has dropped noticeably. 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 CDW Holding to turn into a multi-bagger.

On a side note, CDW Holding's current liabilities have increased over the last five years to 46% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On CDW Holding's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 78% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.