Cerence (NASDAQ:CRNC) May Have Issues Allocating Its Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Cerence (NASDAQ:CRNC), so let's see why.

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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 Cerence, this is the formula:

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

0.018 = US$9.1m ÷ (US$666m - US$158m) (Based on the trailing twelve months to March 2025).

Therefore, Cerence has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Software industry average of 9.8%.

View our latest analysis for Cerence

In the above chart we have measured Cerence'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 Cerence .

So How Is Cerence's ROCE Trending?

In terms of Cerence's historical ROCE trend, it isn't fantastic. The company used to generate 3.2% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 65% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 24%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 1.8%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. This could explain why the stock has sunk a total of 77% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching Cerence, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Cerence 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.