The Returns At Matthews International (NASDAQ:MATW) Aren't Growing

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Matthews International (NASDAQ:MATW) and its ROCE trend, we weren't exactly thrilled.

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

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 Matthews International:

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

0.06 = US$94m ÷ (US$1.9b - US$349m) (Based on the trailing twelve months to December 2023).

So, Matthews International has an ROCE of 6.0%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 10%.

View our latest analysis for Matthews International

Above you can see how the current ROCE for Matthews International compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Matthews International for free.

So How Is Matthews International's ROCE Trending?

We've noticed that although returns on capital are flat over the last five years, the amount of capital employed in the business has fallen 24% in that same period. To us that doesn't look like a multi-bagger because the company appears to be selling assets and it's returns aren't increasing. In addition to that, since the ROCE doesn't scream "quality" at 6.0%, it's hard to get excited about these developments.

The Bottom Line On Matthews International's ROCE

It's a shame to see that Matthews International is effectively shrinking in terms of its capital base. And investors appear hesitant that the trends will pick up because the stock has fallen 23% in the last five years. Therefore based on the analysis done in this article, we don't think Matthews International has the makings of a multi-bagger.

Matthews International does have some risks, we noticed 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Matthews International isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.