What financial metrics can indicate to us that a company is maturing or even in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Cooper-Standard Holdings (NYSE:CPS), we weren't too upbeat about how things were going.
Return On Capital Employed (ROCE): What Is It?
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 Cooper-Standard Holdings, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.05 = US$61m ÷ (US$2.0b - US$805m) (Based on the trailing twelve months to September 2023).
Therefore, Cooper-Standard Holdings has an ROCE of 5.0%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 14%.
View our latest analysis for Cooper-Standard Holdings
In the above chart we have measured Cooper-Standard Holdings' 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 report on analyst forecasts for the company.
The Trend Of ROCE
The trend of returns that Cooper-Standard Holdings is generating are raising some concerns. To be more specific, today's ROCE was 16% five years ago but has since fallen to 5.0%. In addition to that, Cooper-Standard Holdings is now employing 35% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.
On a side note, Cooper-Standard Holdings' current liabilities have increased over the last five years to 40% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 5.0%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
What We Can Learn From Cooper-Standard Holdings' ROCE
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 75% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
Cooper-Standard Holdings does have some risks, we noticed 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.
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.
