If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? 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. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Nexteer Automotive Group (HKG:1316) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

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 Nexteer Automotive Group, this is the formula:

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

0.029 = US$68m ÷ (US$3.4b - US$1.1b) (Based on the trailing twelve months to December 2023).

So, Nexteer Automotive Group has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 5.2%.

In the above chart we have measured Nexteer Automotive Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Nexteer Automotive Group .

The Trend Of ROCE

In terms of Nexteer Automotive Group's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 18% 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 Nexteer Automotive Group becoming one if things continue as they have.

Our Take On Nexteer Automotive Group's ROCE

In summary, it's unfortunate that Nexteer Automotive Group is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 61% 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.

Nexteer Automotive Group does have some risks though, and we've spotted 1 warning sign for Nexteer Automotive Group that you might be interested in.

While Nexteer Automotive Group 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.

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