Nemak S. A. B. de C. V (BMV:NEMAKA) Has Some Difficulty Using Its Capital Effectively

What underlying fundamental trends can indicate that a company might be in decline? 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. On that note, looking into Nemak S. A. B. de C. V (BMV:NEMAKA), we weren't too upbeat about how things were going.

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. Analysts use this formula to calculate it for Nemak S. A. B. de C. V:

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

0.077 = US$267m ÷ (US$5.4b - US$1.9b) (Based on the trailing twelve months to June 2023).

Thus, Nemak S. A. B. de C. V has an ROCE of 7.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.3%.

See our latest analysis for Nemak S. A. B. de C. V

In the above chart we have measured Nemak S. A. B. de C. V'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 Nemak S. A. B. de C. V.

What Does the ROCE Trend For Nemak S. A. B. de C. V Tell Us?

There is reason to be cautious about Nemak S. A. B. de C. V, given the returns are trending downwards. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Nemak S. A. B. de C. V becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Nemak S. A. B. de C. V is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 74% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we've found 2 warning signs for Nemak S. A. B. de C. V that we think you should be aware of.

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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.