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When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Berry (NASDAQ:BRY), the trends above didn't look too great.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Berry is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$156m ÷ (US$1.5b - US$172m) (Based on the trailing twelve months to September 2024).
So, Berry has an ROCE of 12%. That's a pretty standard return and it's in line with the industry average of 12%.
See our latest analysis for Berry
In the above chart we have measured Berry's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Berry .
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about Berry, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 17% 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. If these trends continue, we wouldn't expect Berry to turn into a multi-bagger.
The Bottom Line
In summary, it's unfortunate that Berry is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 40% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Berry does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.
While Berry may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.