The Returns On Capital At Castings (LON:CGS) Don't Inspire Confidence

When researching a stock for investment, what can tell us that the company is 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. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Castings (LON:CGS) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Castings is:

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

0.03 = UK£3.9m ÷ (UK£154m - UK£24m) (Based on the trailing twelve months to September 2020).

Thus, Castings has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 14%.

Check out our latest analysis for Castings

Above you can see how the current ROCE for Castings 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.

So How Is Castings' ROCE Trending?

In terms of Castings' historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 15%, 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. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Castings becoming one if things continue as they have.

The Bottom Line On Castings' ROCE

In summary, it's unfortunate that Castings is generating lower returns from the same amount of capital. Despite the concerning underlying trends, the stock has actually gained 2.9% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about Castings, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

While Castings 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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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.
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