Some Investors May Be Worried About Rieter Holding's (VTX:RIEN) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? 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. So after we looked into Rieter Holding (VTX:RIEN), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)

0.038 = CHF24m ÷ (CHF1.5b - CHF912m) (Based on the trailing twelve months to June 2022).

Thus, Rieter Holding has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 16%.

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?

There is reason to be cautious about Rieter Holding, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 8.0% 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. 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.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 59%, which has impacted the ROCE. 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.

Our Take On Rieter Holding's ROCE

In summary, it's unfortunate that Rieter Holding is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 51% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Rieter Holding we've found 3 warning signs (2 are a bit unpleasant!) that you should be aware of before investing here.

While Rieter Holding 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.