Returns On Capital At Asbestos (CVE:AB.H) Paint A Concerning Picture

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. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Asbestos (CVE:AB.H), we weren't too upbeat about how things were going.

Understanding 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. The formula for this calculation on Asbestos is:

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

0.051 = CA$1.4m ÷ (CA$32m - CA$4.4m) (Based on the trailing twelve months to June 2023).

So, Asbestos has an ROCE of 5.1%. In absolute terms, that's a low return, but it's much better than the Metals and Mining industry average of 2.2%.

See our latest analysis for Asbestos

Historical performance is a great place to start when researching a stock so above you can see the gauge for Asbestos' ROCE against it's prior returns. If you're interested in investigating Asbestos' past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Asbestos' ROCE Trending?

In terms of Asbestos' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.7%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Asbestos to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Asbestos is generating lower returns from the same amount of capital. Yet despite these poor fundamentals, the stock has gained a huge 142% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 6 warning signs with Asbestos (at least 5 which are significant) , and understanding these would certainly be useful.

While Asbestos isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.