Nexteer Automotive Group (HKG:1316) Is Finding It Tricky To Allocate Its Capital

What underlying fundamental trends can indicate that a company might be 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. 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. Having said that, after a brief look, Nexteer Automotive Group (HKG:1316) 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. To calculate this metric for Nexteer Automotive Group, this is the formula:

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

0.029 = US$65m ÷ (US$3.4b - US$1.1b) (Based on the trailing twelve months to June 2024).

So, Nexteer Automotive Group has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.0%.

View our latest analysis for Nexteer Automotive Group

In the above chart we have measured Nexteer Automotive Group's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Nexteer Automotive Group for free.

What Does the ROCE Trend For Nexteer Automotive Group Tell Us?

We are a bit worried about the trend of returns on capital at Nexteer Automotive Group. To be more specific, the ROCE was 15% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Nexteer Automotive Group to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Nexteer Automotive Group is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 58% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Nexteer Automotive Group does come with some risks, and we've found 1 warning sign that you should be aware of.

While Nexteer Automotive Group 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. 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.