Investors Could Be Concerned With Babcock & Wilcox Enterprises' (NYSE:BW) Returns On Capital

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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Babcock & Wilcox Enterprises (NYSE:BW), the trends above didn't look too great.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Babcock & Wilcox Enterprises, this is the formula:

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

0.028 = US$7.2m ÷ (US$658m - US$401m) (Based on the trailing twelve months to September 2025).

Therefore, Babcock & Wilcox Enterprises has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 12%.

Check out our latest analysis for Babcock & Wilcox Enterprises

In the above chart we have measured Babcock & Wilcox Enterprises' 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 Babcock & Wilcox Enterprises for free.

What Can We Tell From Babcock & Wilcox Enterprises' ROCE Trend?

In terms of Babcock & Wilcox Enterprises' historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 6.2% five years ago but has since fallen to 2.8%. On top of that, the business is utilizing 22% 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.

On a side note, Babcock & Wilcox Enterprises' current liabilities have increased over the last five years to 61% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Bottom Line On Babcock & Wilcox Enterprises' ROCE

To see Babcock & Wilcox Enterprises reducing the capital employed in the business in tandem with diminishing returns, is concerning. Yet despite these concerning fundamentals, the stock has performed strongly with a 44% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Babcock & Wilcox Enterprises (including 2 which are potentially serious) .

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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.