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If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Stoneridge (NYSE:SRI), 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. Analysts use this formula to calculate it for Stoneridge:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = US$12m ÷ (US$663m - US$170m) (Based on the trailing twelve months to September 2024).
Therefore, Stoneridge has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 11%.
Check out our latest analysis for Stoneridge
In the above chart we have measured Stoneridge's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Stoneridge .
So How Is Stoneridge's ROCE Trending?
There is reason to be cautious about Stoneridge, given the returns are trending downwards. About five years ago, returns on capital were 15%, 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. 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 Stoneridge to turn into a multi-bagger.
What We Can Learn From Stoneridge's ROCE
In summary, it's unfortunate that Stoneridge is generating lower returns from the same amount of capital. Unsurprisingly then, the stock has dived 79% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you want to continue researching Stoneridge, you might be interested to know about the 2 warning signs that our analysis has discovered.