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What financial metrics can indicate to us that a company is maturing or even in decline? 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Metro Performance Glass (NZSE:MPG), the trends above didn't look too great.
What is Return On Capital Employed (ROCE)?
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 Metro Performance Glass is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.06 = NZ$12m ÷ (NZ$238m - NZ$39m) (Based on the trailing twelve months to March 2021).
Thus, Metro Performance Glass has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Building industry average of 12%.
View our latest analysis for Metro Performance Glass
Above you can see how the current ROCE for Metro Performance Glass compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Metro Performance Glass here for free.
The Trend Of ROCE
In terms of Metro Performance Glass' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 15%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Metro Performance Glass to turn into a multi-bagger.
Our Take On Metro Performance Glass' ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. We expect this has contributed to the stock plummeting 74% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you want to know some of the risks facing Metro Performance Glass we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.