BT Group (LON:BT.A) Could Be At Risk Of Shrinking As A Company

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, BT Group (LON:BT.A) we aren't filled with optimism, but let's investigate further.

Understanding 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. Analysts use this formula to calculate it for BT Group:

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

0.075 = UK£3.1b ÷ (UK£52b - UK£9.8b) (Based on the trailing twelve months to March 2024).

Thus, BT Group has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Telecom industry average of 10.0%.

Check out our latest analysis for BT Group

Above you can see how the current ROCE for BT Group compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for BT Group .

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about BT Group, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 10% that they were earning five years ago. 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 BT Group becoming one if things continue as they have.

What We Can Learn From BT Group's ROCE

In summary, it's unfortunate that BT Group is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 12% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing BT Group, we've discovered 4 warning signs that you should be aware of.

While BT Group 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. 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.