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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. 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Matthews International (NASDAQ:MATW), we've spotted some signs that it could be struggling, so let's investigate.
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. The formula for this calculation on Matthews International is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = US$46m ÷ (US$1.9b - US$380m) (Based on the trailing twelve months to June 2023).
Therefore, Matthews International has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.5%.
See our latest analysis for Matthews International
In the above chart we have measured Matthews International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Matthews International here for free.
What The Trend Of ROCE Can Tell Us
The trend of ROCE at Matthews International is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 3.1% we see today. In addition to that, Matthews International is now employing 29% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
What We Can Learn From Matthews International's ROCE
In summary, it's unfortunate that Matthews International is shrinking its capital base and also generating lower returns. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.