Stock Analysis

Returns On Capital At IPG Photonics (NASDAQ:IPGP) Paint A Concerning Picture

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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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. And from a first read, things don't look too good at IPG Photonics (NASDAQ:IPGP), 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. To calculate this metric for IPG Photonics, this is the formula:

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

0.094 = US$231m ÷ (US$2.7b - US$275m) (Based on the trailing twelve months to December 2022).

Therefore, IPG Photonics has an ROCE of 9.4%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 13%.

Check out our latest analysis for IPG Photonics

NasdaqGS:IPGP Return on Capital Employed March 17th 2023

Above you can see how the current ROCE for IPG Photonics compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at IPG Photonics. To be more specific, the ROCE was 26% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on IPG Photonics becoming one if things continue as they have.

Our Take On IPG Photonics' ROCE

In summary, it's unfortunate that IPG Photonics is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 48% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing, we've spotted 3 warning signs facing IPG Photonics that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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