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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. And from a first read, things don't look too good at Rieter Holding (VTX:RIEN), so let's see why.
What Is 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. Analysts use this formula to calculate it for Rieter Holding:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.042 = CHF27m ÷ (CHF1.5b - CHF891m) (Based on the trailing twelve months to December 2022).
Thus, Rieter Holding has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 15%.
Check out our latest analysis for Rieter Holding
In the above chart we have measured Rieter Holding's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Rieter Holding.
What Does the ROCE Trend For Rieter Holding Tell Us?
In terms of Rieter Holding's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 8.2%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Rieter Holding to turn into a multi-bagger.
On a side note, Rieter Holding's current liabilities have increased over the last five years to 58% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.
The Bottom Line
In summary, it's unfortunate that Rieter Holding is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 45% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.