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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. So after glancing at the trends within Fleetwood (ASX:FWD), 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 Fleetwood, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = AU$8.5m ÷ (AU$251m - AU$74m) (Based on the trailing twelve months to June 2024).
Thus, Fleetwood has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 17%.
View our latest analysis for Fleetwood
Above you can see how the current ROCE for Fleetwood compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Fleetwood .
What Does the ROCE Trend For Fleetwood Tell Us?
In terms of Fleetwood's historical ROCE trend, it isn't fantastic. The company used to generate 9.4% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 25% over that same period. 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 Fleetwood's ROCE
To see Fleetwood reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors must expect better things on the horizon though because the stock has risen 9.4% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
While Fleetwood doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation for FWD on our platform.