Wacker Neuson (ETR:WAC) May Have Issues Allocating Its Capital

What financial metrics can indicate to us that a company is maturing or even 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. In light of that, from a first glance at Wacker Neuson (ETR:WAC), we've spotted some signs that it could be struggling, so let's investigate.

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 Wacker Neuson:

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

0.052 = €100m ÷ (€2.6b - €651m) (Based on the trailing twelve months to September 2024).

Thus, Wacker Neuson has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 9.1%.

View our latest analysis for Wacker Neuson

In the above chart we have measured Wacker Neuson's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Wacker Neuson for free.

What Can We Tell From Wacker Neuson's ROCE Trend?

There is reason to be cautious about Wacker Neuson, given the returns are trending downwards. About five years ago, returns on capital were 9.4%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Wacker Neuson becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Wacker Neuson is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 35% in 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.

If you want to continue researching Wacker Neuson, you might be interested to know about the 3 warning signs that our analysis has discovered.

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.

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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.