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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Steel & Tube Holdings (NZSE:STU), we weren't too hopeful.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Steel & Tube Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = NZ$9.5m ÷ (NZ$354m - NZ$57m) (Based on the trailing twelve months to June 2024).
So, Steel & Tube Holdings has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 10%.
Check out our latest analysis for Steel & Tube Holdings
In the above chart we have measured Steel & Tube Holdings' 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 analyst report for Steel & Tube Holdings .
So How Is Steel & Tube Holdings' ROCE Trending?
We are a bit worried about the trend of returns on capital at Steel & Tube Holdings. To be more specific, the ROCE was 5.8% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Steel & Tube Holdings becoming one if things continue as they have.
What We Can Learn From Steel & Tube Holdings' ROCE
In summary, it's unfortunate that Steel & Tube Holdings is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 34% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.