The Returns On Capital At Glencore (LON:GLEN) Don't Inspire Confidence

By
Simply Wall St
Published
January 25, 2021
LSE:GLEN
Source: Shutterstock

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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Glencore (LON:GLEN), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Glencore is:

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

0.0038 = US$284m ÷ (US$112b - US$38b) (Based on the trailing twelve months to June 2020).

Therefore, Glencore has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 12%.

Check out our latest analysis for Glencore

roce
LSE:GLEN Return on Capital Employed January 26th 2021

In the above chart we have measured Glencore'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 Glencore.

What Can We Tell From Glencore's ROCE Trend?

The trend of ROCE at Glencore is showing some signs of weakness. To be more specific, today's ROCE was 3.0% five years ago but has since fallen to 0.4%. On top of that, the business is utilizing 27% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Our Take On Glencore's ROCE

In summary, it's unfortunate that Glencore is shrinking its capital base and also generating lower returns. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 252%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Glencore does have some risks, we noticed 2 warning signs (and 1 which is significant) we think you should know about.

While Glencore isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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