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What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Embelton (ASX:EMB) we aren't filled with optimism, but let's investigate further.
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. The formula for this calculation on Embelton is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = AU$1.6m ÷ (AU$31m - AU$10m) (Based on the trailing twelve months to December 2023).
Therefore, Embelton has an ROCE of 8.2%. In absolute terms, that's a low return and it also under-performs the Building industry average of 11%.
Check out our latest analysis for Embelton
Historical performance is a great place to start when researching a stock so above you can see the gauge for Embelton's ROCE against it's prior returns. If you're interested in investigating Embelton's past further, check out this free graph covering Embelton's past earnings, revenue and cash flow.
So How Is Embelton's ROCE Trending?
There is reason to be cautious about Embelton, given the returns are trending downwards. 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 Embelton becoming one if things continue as they have.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 34%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.
The Bottom Line On Embelton's ROCE
In summary, it's unfortunate that Embelton is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 6.9% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.