The Returns On Capital At Exco Technologies (TSE:XTC) Don't Inspire Confidence

When researching a stock for investment, what can tell us that the company is 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Exco Technologies (TSE:XTC), we weren't too hopeful.

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 Exco Technologies:

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

0.091 = CA$31m ÷ (CA$417m - CA$74m) (Based on the trailing twelve months to March 2021).

Thus, Exco Technologies has an ROCE of 9.1%. On its own, that's a low figure but it's around the 10% average generated by the Auto Components industry.

Check out our latest analysis for Exco Technologies

Above you can see how the current ROCE for Exco Technologies compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Exco Technologies.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Exco Technologies. Unfortunately the returns on capital have diminished from the 19% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Exco Technologies to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Exco Technologies is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 3.0% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Exco Technologies, you might be interested to know about the 2 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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