When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. 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 Schweiter Technologies (VTX:SWTQ), we weren't too hopeful.

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. Analysts use this formula to calculate it for Schweiter Technologies:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.032 = CHF28m ÷ (CHF1.1b - CHF251m) (Based on the trailing twelve months to June 2023).

So, Schweiter Technologies has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Building industry average of 20%.

Check out our latest analysis for Schweiter Technologies

In the above chart we have measured Schweiter Technologies' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Schweiter Technologies here for free.

How Are Returns Trending?

In terms of Schweiter Technologies' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 9.5% 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. If these trends continue, we wouldn't expect Schweiter Technologies to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Schweiter Technologies 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 39% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.