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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? More often than not, we'll see a declining return on capital employed (ROCE) and a declining 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. On that note, looking into Micro-Mechanics (Holdings) (SGX:5DD), we weren't too upbeat about how things were going.
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 Micro-Mechanics (Holdings) is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = S$11m ÷ (S$54m - S$7.3m) (Based on the trailing twelve months to March 2024).
Therefore, Micro-Mechanics (Holdings) has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 6.7%.
Check out our latest analysis for Micro-Mechanics (Holdings)
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Micro-Mechanics (Holdings)'s past further, check out this free graph covering Micro-Mechanics (Holdings)'s past earnings, revenue and cash flow.
So How Is Micro-Mechanics (Holdings)'s ROCE Trending?
The trend of ROCE at Micro-Mechanics (Holdings) is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 23% we see today. On top of that, the business is utilizing 22% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. 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.
In Conclusion...
To see Micro-Mechanics (Holdings) reducing the capital employed in the business in tandem with diminishing returns, is concerning. Despite the concerning underlying trends, the stock has actually gained 26% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.