Cavotec (STO:CCC) Is Finding It Tricky To Allocate Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. And from a first read, things don't look too good at Cavotec (STO:CCC), so let's see why.

Return On Capital Employed (ROCE): What is it?

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 Cavotec:

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

0.023 = €3.3m ÷ (€203m - €59m) (Based on the trailing twelve months to March 2021).

Therefore, Cavotec has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Machinery industry average of 16%.

View our latest analysis for Cavotec

In the above chart we have measured Cavotec's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

We are a bit anxious about the trends of ROCE at Cavotec. To be more specific, today's ROCE was 4.6% five years ago but has since fallen to 2.3%. In addition to that, Cavotec is now employing 24% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. Despite the concerning underlying trends, the stock has actually gained 24% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know about the risks facing Cavotec, we've discovered 1 warning sign that you should be aware of.

While Cavotec 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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