If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. On that note, looking into Core Laboratories (NYSE:CLB), we weren't too upbeat about how things were going.

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. The formula for this calculation on Core Laboratories is:

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

0.11 = US$56m ÷ (US$586m - US$88m) (Based on the trailing twelve months to December 2023).

Thus, Core Laboratories has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Energy Services industry average of 13%.

Above you can see how the current ROCE for Core Laboratories compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Core Laboratories for free.

What Does the ROCE Trend For Core Laboratories Tell Us?

There is reason to be cautious about Core Laboratories, given the returns are trending downwards. About five years ago, returns on capital were 22%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Core Laboratories to turn into a multi-bagger.

The Bottom Line On Core Laboratories' ROCE

In summary, it's unfortunate that Core Laboratories is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 75% in the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing Core Laboratories, we've discovered 1 warning sign that you should be aware of.

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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