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What underlying fundamental trends can indicate that a company might be in decline? 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Gentex (NASDAQ:GNTX) we aren’t filled with optimism, but let’s investigate further.
What Is Return On Capital Employed (ROCE)?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Gentex is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.18 = US$365m ÷ (US$2.3b – US$286m) (Based on the trailing twelve months to June 2022).
So, Gentex has an ROCE of 18%. In absolute terms, that’s a satisfactory return, but compared to the Auto Components industry average of 9.8% it’s much better.
Check out our latest analysis for Gentex
Above you can see how the current ROCE for Gentex compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free report for Gentex.
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at Gentex. About five years ago, returns on capital were 25%, however they’re now substantially lower than that as we saw above. On top of that, it’s worth noting that the amount of capital employed within the business has remained relatively steady. 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. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on Gentex becoming one if things continue as they have.
In Conclusion…
In summary, it’s unfortunate that Gentex is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 73% return. Regardless, we don’t feel too comfortable with the fundamentals so we’d be steering clear of this stock for now.
Gentex does have some risks though, and we’ve spotted 1 warning sign for Gentex that you might be interested in.
While Gentex 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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