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When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within First Sensor (ETR:SIS), we weren't too hopeful.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for First Sensor, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00038 = €53k ÷ (€156m - €18m) (Based on the trailing twelve months to June 2024).
So, First Sensor has an ROCE of 0.04%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 14%.
See our latest analysis for First Sensor
Historical performance is a great place to start when researching a stock so above you can see the gauge for First Sensor's ROCE against it's prior returns. If you're interested in investigating First Sensor's past further, check out this free graph covering First Sensor's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about First Sensor, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 6.8% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on First Sensor becoming one if things continue as they have.
In Conclusion...
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Yet despite these concerning fundamentals, the stock has performed strongly with a 94% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.