These Return Metrics Don't Make Universal Stainless & Alloy Products (NASDAQ:USAP) Look Too Strong

When researching a stock for investment, what can tell us that the company is in decline? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Universal Stainless & Alloy Products (NASDAQ:USAP), so let's see why.

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. To calculate this metric for Universal Stainless & Alloy Products, this is the formula:

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

0.019 = US$5.8m ÷ (US$357m - US$45m) (Based on the trailing twelve months to September 2023).

Therefore, Universal Stainless & Alloy Products has an ROCE of 1.9%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 9.9%.

View our latest analysis for Universal Stainless & Alloy Products

In the above chart we have measured Universal Stainless & Alloy Products' 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 Universal Stainless & Alloy Products.

What The Trend Of ROCE Can Tell Us

In terms of Universal Stainless & Alloy Products' historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 5.2% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Universal Stainless & Alloy Products to turn into a multi-bagger.

The Bottom Line On Universal Stainless & Alloy Products' ROCE

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. It should come as no surprise then that the stock has fallen 17% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a separate note, we've found 1 warning sign for Universal Stainless & Alloy Products you'll probably want to know about.

While Universal Stainless & Alloy Products may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.