If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. 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 we looked into Kimberly-Clark (NYSE:KMB), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Kimberly-Clark is:

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

0.25 = US$2.7b ÷ (US$18b - US$7.2b) (Based on the trailing twelve months to June 2022).

So, Kimberly-Clark has an ROCE of 25%. In absolute terms that's a great return and it's even better than the Household Products industry average of 14%.

Check out our latest analysis for Kimberly-Clark

In the above chart we have measured Kimberly-Clark's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kimberly-Clark.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Kimberly-Clark. About five years ago, returns on capital were 37%, however they're now substantially lower than that as we saw above. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Kimberly-Clark becoming one if things continue as they have.

Our Take On Kimberly-Clark's ROCE

In summary, it's unfortunate that Kimberly-Clark is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 31% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Kimberly-Clark does have some risks though, and we've spotted 1 warning sign for Kimberly-Clark that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.