When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Seagate Technology Holdings (NASDAQ:STX), we've spotted some signs that it could be struggling, so let's investigate.
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 Seagate Technology Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0065 = US$30m ÷ (US$7.1b - US$2.5b) (Based on the trailing twelve months to December 2023).
Therefore, Seagate Technology Holdings has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 7.5%.
In the above chart we have measured Seagate Technology Holdings' 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 Seagate Technology Holdings for free.
How Are Returns Trending?
In terms of Seagate Technology Holdings' historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 0.6% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 29% 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. If these underlying trends continue, we wouldn't be too optimistic going forward.
Our Take On Seagate Technology Holdings' ROCE
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 136%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.
If you want to continue researching Seagate Technology Holdings, you might be interested to know about the 3 warning signs that our analysis has discovered.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.