Gentex's (NASDAQ:GNTX) Returns On Capital Tell Us There Is Reason To Feel Uneasy

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at Gentex (NASDAQ:GNTX), so let's see why.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Gentex is:

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

0.18 = US$370m ÷ (US$2.3b - US$251m) (Based on the trailing twelve months to December 2022).

So, Gentex has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Auto Components industry average of 12% it's much better.

Check out our latest analysis for Gentex

In the above chart we have measured Gentex'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 Gentex here for free.

How Are Returns Trending?

There is reason to be cautious about Gentex, given the returns are trending downwards. To be more specific, the ROCE was 25% 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 Gentex to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that Gentex is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 27% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

While Gentex doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.