If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 Stoneridge (NYSE:SRI), we weren't too upbeat about how things were going.
Understanding 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 Stoneridge:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0048 = US$2.3m ÷ (US$622m - US$150m) (Based on the trailing twelve months to December 2024).
Thus, Stoneridge has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 11%.
See our latest analysis for Stoneridge
Above you can see how the current ROCE for Stoneridge 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 Stoneridge .
How Are Returns Trending?
There is reason to be cautious about Stoneridge, 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. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Stoneridge becoming one if things continue as they have.
The Bottom Line On Stoneridge's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. We expect this has contributed to the stock plummeting 71% during the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you want to know some of the risks facing Stoneridge we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.
While Stoneridge isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.