Mohawk Industries (NYSE:MHK) Will Be Hoping To Turn Its Returns On Capital Around

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Mohawk Industries (NYSE:MHK), so let's see why.

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. Analysts use this formula to calculate it for Mohawk Industries:

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

0.098 = US$1.1b ÷ (US$14b - US$3.1b) (Based on the trailing twelve months to December 2022).

Thus, Mohawk Industries has an ROCE of 9.8%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 17%.

View our latest analysis for Mohawk Industries

Above you can see how the current ROCE for Mohawk Industries 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 report for Mohawk Industries.

What Does the ROCE Trend For Mohawk Industries Tell Us?

There is reason to be cautious about Mohawk Industries, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 15% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Mohawk Industries to turn into a multi-bagger.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 60% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Mohawk Industries does come with some risks, and we've found 3 warning signs that 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.