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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. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Ibstock (LON:IBST), we weren't too upbeat about how things were going.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Ibstock:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = UK£41m ÷ (UK£760m - UK£135m) (Based on the trailing twelve months to June 2024).
Thus, Ibstock has an ROCE of 6.5%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 8.6%.
See our latest analysis for Ibstock
Above you can see how the current ROCE for Ibstock 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 Ibstock .
So How Is Ibstock's ROCE Trending?
There is reason to be cautious about Ibstock, given the returns are trending downwards. To be more specific, the ROCE was 13% five years ago, but since then it has dropped noticeably. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Ibstock becoming one if things continue as they have.
What We Can Learn From Ibstock's ROCE
In summary, it's unfortunate that Ibstock is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 35% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Ibstock does have some risks, we noticed 3 warning signs (and 1 which can't be ignored) we think you should know about.