Is Metall Zug (VTX:METN) Headed For Trouble?

What underlying fundamental trends can indicate that a company might be 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. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into Metall Zug (VTX:METN), we weren't too upbeat about how things were going.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Metall Zug:

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

0.071 = CHF38m ÷ (CHF679m - CHF145m) (Based on the trailing twelve months to June 2020).

Therefore, Metall Zug has an ROCE of 7.1%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 9.1%.

View our latest analysis for Metall Zug

Above you can see how the current ROCE for Metall Zug compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Metall Zug's ROCE Trend?

The trend of returns that Metall Zug is generating are raising some concerns. The company used to generate 9.6% on its capital five years ago but it has since fallen noticeably. In addition to that, Metall Zug is now employing 36% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Despite the concerning underlying trends, the stock has actually gained 1.4% 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.

One more thing, we've spotted 1 warning sign facing Metall Zug that you might find interesting.

While Metall Zug may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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