What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Ibstock (LON:IBST), the trends above didn't look too great.

What is Return On Capital Employed (ROCE)?

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 Ibstock, this is the formula:

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

0.03 = UK£17m ÷ (UK£680m - UK£98m) (Based on the trailing twelve months to December 2020).

Therefore, Ibstock has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Basic Materials industry average of 7.4%.

Check out our latest analysis for Ibstock

In the above chart we have measured Ibstock'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 report for Ibstock.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Ibstock. About five years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. 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 Ibstock becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Ibstock is generating lower returns from the same amount of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 101%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

While Ibstock doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.