If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Stericycle (NASDAQ:SRCL), the trends above didn't look too great.

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. The formula for this calculation on Stericycle is:

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

0.033 = US$156m ÷ (US$5.4b - US$619m) (Based on the trailing twelve months to June 2022).

Thus, Stericycle has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Commercial Services industry average of 9.0%.

See our latest analysis for Stericycle

In the above chart we have measured Stericycle'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 Stericycle here for free.

What Can We Tell From Stericycle's ROCE Trend?

The trend of ROCE at Stericycle is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 3.3% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 22% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line

In summary, it's unfortunate that Stericycle is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 29% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you're still interested in Stericycle it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Stericycle 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.