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What underlying fundamental trends can indicate that a company might be in decline? 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Speedy Hire (LON:SDY), we weren't too hopeful.
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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. To calculate this metric for Speedy Hire, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = UK£21m ÷ (UK£505m - UK£137m) (Based on the trailing twelve months to September 2024).
Therefore, Speedy Hire has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 14%.
Check out our latest analysis for Speedy Hire
In the above chart we have measured Speedy Hire's 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 Speedy Hire for free.
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about Speedy Hire, given the returns are trending downwards. About five years ago, returns on capital were 10%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Speedy Hire to turn into a multi-bagger.
Our Take On Speedy Hire's ROCE
In summary, it's unfortunate that Speedy Hire is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 46% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
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