Some Investors May Be Worried About L.B. Foster's (NASDAQ:FSTR) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at L.B. Foster (NASDAQ:FSTR), so let's see why.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for L.B. Foster, this is the formula:

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

0.069 = US$17m ÷ (US$334m - US$88m) (Based on the trailing twelve months to December 2024).

Thus, L.B. Foster has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 12%.

Check out our latest analysis for L.B. Foster

In the above chart we have measured L.B. Foster'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 analyst report for L.B. Foster .

So How Is L.B. Foster's ROCE Trending?

We are a bit worried about the trend of returns on capital at L.B. Foster. Unfortunately the returns on capital have diminished from the 10% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on L.B. Foster becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that L.B. Foster is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 57% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

L.B. Foster does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

While L.B. Foster may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.