What underlying fundamental trends can indicate that a company might be in decline? 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Knowles (NYSE:KN), we weren't too hopeful.
Understanding Return On Capital Employed (ROCE)
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 Knowles, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = US$54m ÷ (US$1.5b - US$165m) (Based on the trailing twelve months to December 2023).
Therefore, Knowles has an ROCE of 4.2%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 12%.
Above you can see how the current ROCE for Knowles compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Knowles here for free.
What Can We Tell From Knowles' ROCE Trend?
We are a bit worried about the trend of returns on capital at Knowles. Unfortunately the returns on capital have diminished from the 5.8% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Knowles to turn into a multi-bagger.
The Key Takeaway
In summary, it's unfortunate that Knowles is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 0.6% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.
Knowles 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.