Be Wary Of Sensata Technologies Holding (NYSE:ST) And Its 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Sensata Technologies Holding (NYSE:ST), the trends above didn't look too great.

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. The formula for this calculation on Sensata Technologies Holding is:

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

0.084 = US$570m ÷ (US$7.6b - US$794m) (Based on the trailing twelve months to March 2024).

Thus, Sensata Technologies Holding has an ROCE of 8.4%. Ultimately, that's a low return and it under-performs the Electrical industry average of 14%.

View our latest analysis for Sensata Technologies Holding

In the above chart we have measured Sensata Technologies Holding'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 Sensata Technologies Holding .

What Can We Tell From Sensata Technologies Holding's ROCE Trend?

We are a bit worried about the trend of returns on capital at Sensata Technologies Holding. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Sensata Technologies Holding becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Sensata Technologies Holding is generating lower returns from the same amount of capital. In spite of that, the stock has delivered a 1.0% return to shareholders who held over 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.

On a final note, we've found 1 warning sign for Sensata Technologies Holding that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.