When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at Ashland (NYSE:ASH), so let's see why.
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 Ashland:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0093 = US$51m ÷ (US$5.9b - US$453m) (Based on the trailing twelve months to March 2024).
Therefore, Ashland has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.8%.
Check out our latest analysis for Ashland
In the above chart we have measured Ashland'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 analyst report for Ashland .
So How Is Ashland's ROCE Trending?
We are a bit anxious about the trends of ROCE at Ashland. Unfortunately, returns have declined substantially over the last five years to the 0.9% we see today. In addition to that, Ashland is now employing 22% 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. If these underlying trends continue, we wouldn't be too optimistic going forward.
Our Take On Ashland's ROCE
In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. In spite of that, the stock has delivered a 33% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
Ashland does have some risks though, and we've spotted 2 warning signs for Ashland that you might be interested in.
While Ashland 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.
About NYSE:ASH
Ashland
Provides additives and specialty ingredients in the North and Latin America, Europe, Asia Pacific, and internationally.
Undervalued with adequate balance sheet and pays a dividend.
