These Return Metrics Don't Make Northrop Grumman (NYSE:NOC) Look Too Strong

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount 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. In light of that, from a first glance at Northrop Grumman (NYSE:NOC), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for Northrop Grumman:

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

0.088 = US$3.1b ÷ (US$48b - US$13b) (Based on the trailing twelve months to September 2024).

Therefore, Northrop Grumman has an ROCE of 8.8%. In absolute terms, that's a low return but it's around the Aerospace & Defense industry average of 9.6%.

See our latest analysis for Northrop Grumman

Above you can see how the current ROCE for Northrop Grumman compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Northrop Grumman .

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Northrop Grumman. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Northrop Grumman to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Northrop Grumman is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 32% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you'd like to know about the risks facing Northrop Grumman, we've discovered 2 warning signs that you should be aware of.

While Northrop Grumman 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.