Here's What's Concerning About Sensient Technologies' (NYSE:SXT) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Sensient Technologies (NYSE:SXT) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Sensient Technologies is:

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

0.10 = US$191m ÷ (US$2.0b - US$223m) (Based on the trailing twelve months to June 2023).

Therefore, Sensient Technologies has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Chemicals industry.

See our latest analysis for Sensient Technologies

In the above chart we have measured Sensient Technologies' 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 Sensient Technologies here for free.

What Does the ROCE Trend For Sensient Technologies Tell Us?

We are a bit worried about the trend of returns on capital at Sensient Technologies. About five years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. 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 Sensient Technologies to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Sensient Technologies is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing Sensient Technologies we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

While Sensient Technologies 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.