Is Matrix Service (NASDAQ:MTRX) Set To Make A Turnaround?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. 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 Matrix Service (NASDAQ:MTRX), 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 Matrix Service is:

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

0.013 = US$4.4m ÷ (US$512m - US$170m) (Based on the trailing twelve months to September 2020).

Therefore, Matrix Service has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10%.

See our latest analysis for Matrix Service

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

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Matrix Service. About five years ago, returns on capital were 4.9%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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. If these trends continue, we wouldn't expect Matrix Service to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Matrix Service is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 27% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing Matrix Service that you might find interesting.

While Matrix Service 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. 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.
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