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To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. On that note, looking into Carrier Global (NYSE:CARR), we weren't too upbeat about how things were going.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Carrier Global:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = US$2.1b ÷ (US$25b - US$5.1b) (Based on the trailing twelve months to March 2021).
Thus, Carrier Global has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 13% generated by the Building industry.
See our latest analysis for Carrier Global
Above you can see how the current ROCE for Carrier Global compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Carrier Global.
What The Trend Of ROCE Can Tell Us
We are a bit worried about the trend of returns on capital at Carrier Global. About two years ago, returns on capital were 16%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 two years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Carrier Global becoming one if things continue as they have.
The Bottom Line
In summary, it's unfortunate that Carrier Global is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last yearthe stock has delivered a respectable 97% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.