If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base 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. So after we looked into Core Laboratories (NYSE:CLB), the trends above didn't look too great.

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. 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$55m ÷ (US$598m - US$98m) (Based on the trailing twelve months to June 2024).

So, Core Laboratories has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

In the above chart we have measured Core Laboratories' prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Core Laboratories for free.

What The Trend Of ROCE Can Tell Us

We aren't too thrilled by the trend because ROCE has declined 27% over the last five years and despite the capital raising conducted before the latest reports, the business has -24% less capital employed.

Our Take On Core Laboratories' ROCE

In summary, it's unfortunate that Core Laboratories is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 53% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a separate note, we've found 2 warning signs for Core Laboratories you'll probably want to know about.

While Core Laboratories isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.