Is MAHLE Metal Leve (BVMF:LEVE3) Set To Make A Turnaround?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at MAHLE Metal Leve (BVMF:LEVE3), so let's see why.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on MAHLE Metal Leve is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = R$200m ÷ (R$2.7b - R$954m) (Based on the trailing twelve months to September 2020).

Thus, MAHLE Metal Leve has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.5% generated by the Auto Components industry.

View our latest analysis for MAHLE Metal Leve

In the above chart we have measured MAHLE Metal Leve'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 MAHLE Metal Leve's ROCE Trending?

We are a bit worried about the trend of returns on capital at MAHLE Metal Leve. To be more specific, the ROCE was 18% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect MAHLE Metal Leve to turn into a multi-bagger.

What We Can Learn From MAHLE Metal Leve's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 1.7% 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.

On a final note, we've found 4 warning signs for MAHLE Metal Leve that we think you should be aware of.

While MAHLE Metal Leve may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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