Adecco Group's (VTX:ADEN) Returns On Capital Not Reflecting Well On The Business

When researching a stock for investment, what can tell us that the company is in decline? 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. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Adecco Group (VTX:ADEN), we weren't too upbeat about how things were going.

What Is 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. Analysts use this formula to calculate it for Adecco Group:

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

0.10 = €695m ÷ (€12b - €4.9b) (Based on the trailing twelve months to September 2024).

Therefore, Adecco Group has an ROCE of 10.0%. Ultimately, that's a low return and it under-performs the Professional Services industry average of 13%.

Check out our latest analysis for Adecco Group

In the above chart we have measured Adecco Group'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 analyst report for Adecco Group .

What Can We Tell From Adecco Group's ROCE Trend?

We are a bit worried about the trend of returns on capital at Adecco Group. About five years ago, returns on capital were 17%, 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 Adecco Group to turn into a multi-bagger.

Another thing to note, Adecco Group has a high ratio of current liabilities to total assets of 41%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 53% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Adecco Group, we've spotted 3 warning signs, and 2 of them shouldn't be ignored.

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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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.