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If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, Newmark Security (LON:NWT) we aren't filled with optimism, but let's investigate further.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Newmark Security, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = UK£442k ÷ (UK£15m - UK£5.6m) (Based on the trailing twelve months to October 2024).
Thus, Newmark Security has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Electronic industry average of 9.8%.
View our latest analysis for Newmark Security
Historical performance is a great place to start when researching a stock so above you can see the gauge for Newmark Security's ROCE against it's prior returns. If you're interested in investigating Newmark Security's past further, check out this free graph covering Newmark Security's past earnings, revenue and cash flow.
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at Newmark Security. About five years ago, returns on capital were 8.9%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. If these trends continue, we wouldn't expect Newmark Security to turn into a multi-bagger.
Our Take On Newmark Security's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. In spite of that, the stock has delivered a 32% 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.