Returns On Capital At Quadient (EPA:QDT) Paint A Concerning Picture

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Quadient (EPA:QDT), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Quadient is:

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

0.073 = €160m ÷ (€2.8b - €591m) (Based on the trailing twelve months to July 2021).

Therefore, Quadient has an ROCE of 7.3%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.3%.

View our latest analysis for Quadient

In the above chart we have measured Quadient'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 Quadient.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Quadient. About five years ago, returns on capital were 10%, 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. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Quadient becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Quadient is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 26% 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.

Quadient does have some risks though, and we've spotted 3 warning signs for Quadient that you might be interested in.

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.