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When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at PageGroup (LON:PAGE), we've spotted some signs that it could be struggling, so let's investigate.
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. Analysts use this formula to calculate it for PageGroup:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = UK£83m ÷ (UK£642m - UK£274m) (Based on the trailing twelve months to June 2024).
Thus, PageGroup has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 17%.
View our latest analysis for PageGroup
In the above chart we have measured PageGroup'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 PageGroup for free.
What Can We Tell From PageGroup's ROCE Trend?
The trend of returns that PageGroup is generating are raising some concerns. The company used to generate 32% on its capital five years ago but it has since fallen noticeably. 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. If these underlying trends continue, we wouldn't be too optimistic going forward.
Another thing to note, PageGroup has a high ratio of current liabilities to total assets of 43%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line
In summary, it's unfortunate that PageGroup is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 10% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.