What financial indicators can tell us that a business is maturing or even declining? When we see a drop return on capital employed (ROCE) in connection with a decrease based capital employed is often how a mature business shows signs of aging. This reveals that the company is not increasing the wealth of its shareholders, as returns decline and its net assets shrink. In light of this, a first glance at ITT (NYSE: ITT), we’ve spotted signs that this may be in trouble, 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 annual pre-tax profit (its return), relative to the capital employed in the company. Analysts use this formula to calculate it for ITT:
Return on capital employed = Profit before interest and taxes (EBIT) ÷ (Total assets – Current liabilities)
0.07 = US $ 235 million ÷ (US $ 4.2 billion – US $ 827 million) (Based on the last twelve months up to March 2021).
Therefore, ITT has a ROCE of 7.0%. In absolute terms, this is a low efficiency and it is also below the machinery industry average of 9.1%.
See our latest analysis for ITT
Above you can see how ITT’s current ROCE compares to its previous returns on capital, but there is little you can say about the past. If you are interested, you can view the analysts’ forecasts in our free analyst forecast report for the company.
The ROCE trend
In terms of ITT’s historic ROCE moves, the trend is not inspiring confidence. To be more precise, the ROCE was 11% five years ago, but since then it has fallen noticeably. In addition to this, it should be noted that the amount of capital employed within the company has remained relatively stable. Companies that exhibit these attributes tend not to shrink, but they can be mature and face pressure on their competitive margins. So, because these trends are generally not conducive to building a multi-bagger, we won’t hold our breath on ITT becoming one if things continue as they did.
Our opinion on ITT’s ROCE
Overall, lower returns for the same amount of capital employed aren’t exactly signs of a dialing machine. Yet despite these poor fundamentals, the stock has gained a whopping 199% over the past five years, so investors are looking very bullish. Regardless, we don’t feel very comfortable with the fundamentals so we’re avoiding this title for now.
On a separate note, we have found 2 warning signs for ITT you will probably want to know more.
For those who like to invest in solid companies, Check it out free list of companies with strong balance sheets and high returns on equity.
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