What International Game Technology's (NYSE:IGT) Returns On Capital Can Tell Us

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within International Game Technology (NYSE:IGT), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on International Game Technology is:

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

0.036 = US$375m ÷ (US$13b - US$2.5b) (Based on the trailing twelve months to September 2020).

Thus, International Game Technology has an ROCE of 3.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.1%.

View our latest analysis for International Game Technology

In the above chart we have measured International Game Technology's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering International Game Technology here for free.

So How Is International Game Technology's ROCE Trending?

The trend of ROCE at International Game Technology is showing some signs of weakness. To be more specific, today's ROCE was 4.7% five years ago but has since fallen to 3.6%. In addition to that, International Game Technology is now employing 24% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

In Conclusion...

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 65% return. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a separate note, we've found 1 warning sign for International Game Technology you'll probably want to know about.

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