The Returns On Capital At Advent-AWI Holdings (CVE:AWI) Don't Inspire Confidence

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Advent-AWI Holdings (CVE:AWI) we aren't filled with optimism, but let's investigate further.

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. To calculate this metric for Advent-AWI Holdings, this is the formula:

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

0.014 = CA$200k ÷ (CA$16m - CA$1.7m) (Based on the trailing twelve months to March 2023).

Therefore, Advent-AWI Holdings has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 12%.

View our latest analysis for Advent-AWI Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Advent-AWI Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Advent-AWI Holdings, check out these free graphs here.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Advent-AWI Holdings. Unfortunately the returns on capital have diminished from the 7.2% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Advent-AWI Holdings to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Advent-AWI Holdings is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 34% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we found 7 warning signs for Advent-AWI Holdings (4 are a bit unpleasant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.