Metro Performance Glass' (NZSE:MPG) Returns On Capital Not Reflecting Well On The Business

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Metro Performance Glass (NZSE:MPG) 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. The formula for this calculation on Metro Performance Glass is:

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

0.029 = NZ$5.9m ÷ (NZ$241m - NZ$38m) (Based on the trailing twelve months to September 2021).

Thus, Metro Performance Glass has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Building industry average of 11%.

Check out our latest analysis for Metro Performance Glass

Above you can see how the current ROCE for Metro Performance Glass 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.

What Does the ROCE Trend For Metro Performance Glass Tell Us?

The trend of returns that Metro Performance Glass is generating are raising some concerns. The company used to generate 13% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 21% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. 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.

In Conclusion...

To see Metro Performance Glass reducing the capital employed in the business in tandem with diminishing returns, is concerning. We expect this has contributed to the stock plummeting 75% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Metro Performance Glass (including 1 which can't be ignored) .

While Metro Performance Glass 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.