Some Investors May Be Worried About Socket Mobile's (NASDAQ:SCKT) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. In light of that, from a first glance at Socket Mobile (NASDAQ:SCKT), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Socket Mobile:

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

0.017 = US$393k ÷ (US$28m - US$5.1m) (Based on the trailing twelve months to September 2022).

So, Socket Mobile has an ROCE of 1.7%. Ultimately, that's a low return and it under-performs the Tech industry average of 12%.

View our latest analysis for Socket Mobile

Historical performance is a great place to start when researching a stock so above you can see the gauge for Socket Mobile's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Socket Mobile, check out these free graphs here.

The Trend Of ROCE

In terms of Socket Mobile's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 15% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Socket Mobile becoming one if things continue as they have.

What We Can Learn From Socket Mobile's ROCE

In summary, it's unfortunate that Socket Mobile is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 35% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we've found 2 warning signs for Socket Mobile that we think you should be aware of.

While Socket Mobile 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.