What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Wärtsilä Oyj Abp (HEL:WRT1V), so let's see why.
Return On Capital Employed (ROCE): What is it?
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 Wärtsilä Oyj Abp:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = €220m ÷ (€6.3b - €2.7b) (Based on the trailing twelve months to March 2021).
Thus, Wärtsilä Oyj Abp has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 9.6%.
Above you can see how the current ROCE for Wärtsilä Oyj Abp 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.
How Are Returns Trending?
In terms of Wärtsilä Oyj Abp's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 18% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Wärtsilä Oyj Abp to turn into a multi-bagger.
On a separate but related note, it's important to know that Wärtsilä Oyj Abp has a current liabilities to total assets ratio of 44%, which we'd consider pretty high. 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.
Our Take On Wärtsilä Oyj Abp's ROCE
In summary, it's unfortunate that Wärtsilä Oyj Abp is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 3.6% 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.
Like most companies, Wärtsilä Oyj Abp does come with some risks, and we've found 2 warning signs that you should be aware of.
While Wärtsilä Oyj Abp isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
When trading stocks or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.