When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. In light of that, from a first glance at Nexteer Automotive Group (HKG:1316), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Nexteer Automotive Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.052 = US$121m ÷ (US$3.4b - US$1.0b) (Based on the trailing twelve months to June 2023).
So, Nexteer Automotive Group has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 6.7%.
View our latest analysis for Nexteer Automotive Group
In the above chart we have measured Nexteer Automotive Group'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 report on analyst forecasts for the company.
So How Is Nexteer Automotive Group's ROCE Trending?
In terms of Nexteer Automotive Group's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 20% five years ago, but since then it has dropped noticeably. 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. If these trends continue, we wouldn't expect Nexteer Automotive Group to turn into a multi-bagger.
The Bottom Line On Nexteer Automotive Group's ROCE
In summary, it's unfortunate that Nexteer Automotive Group is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 59% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
Nexteer Automotive Group could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.