Capital Allocation Trends At Matthews International (NASDAQ:MATW) Aren't Ideal

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Matthews International (NASDAQ:MATW), the trends above didn't look too great.

Understanding 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 Matthews International is:

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

0.031 = US$46m ÷ (US$1.9b - US$380m) (Based on the trailing twelve months to June 2023).

Thus, Matthews International has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 8.5%.

View our latest analysis for Matthews International

In the above chart we have measured Matthews International's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Matthews International.

What Does the ROCE Trend For Matthews International Tell Us?

The trend of ROCE at Matthews International is showing some signs of weakness. The company used to generate 5.6% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 29% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line On Matthews International's ROCE

To see Matthews International reducing the capital employed in the business in tandem with diminishing returns, is concerning. In spite of that, the stock has delivered a 1.1% 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.

One final note, you should learn about the 2 warning signs we've spotted with Matthews International (including 1 which is concerning) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.