Capital Allocation Trends At Venator Materials (NYSE:VNTR) Aren't Ideal

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. On that note, looking into Venator Materials (NYSE:VNTR), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Venator Materials:

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

0.006 = US$10m ÷ (US$2.1b - US$489m) (Based on the trailing twelve months to September 2022).

So, Venator Materials has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 12%.

Check out our latest analysis for Venator Materials

Above you can see how the current ROCE for Venator Materials 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 Venator Materials.

How Are Returns Trending?

We are a bit anxious about the trends of ROCE at Venator Materials. Unfortunately, returns have declined substantially over the last five years to the 0.6% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 24% over that same period. 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.

In Conclusion...

To see Venator Materials reducing the capital employed in the business in tandem with diminishing returns, is concerning. This could explain why the stock has sunk a total of 97% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 5 warning signs for Venator Materials (2 don't sit too well with us) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.