What financial metrics can indicate to us that a company is maturing or even 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. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don’t look too good at AIREA (LON:AIEA), so let’s see why.
Understanding 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. To calculate this metric for AIREA, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.019 = UK£368k ÷ (UK£24m – UK£4.7m) (Based on the trailing twelve months to December 2020).
Thus, AIREA has an ROCE of 1.9%. Ultimately, that’s a low return and it under-performs the Consumer Durables industry average of 7.2%.
See our latest analysis for AIREA
Historical performance is a great place to start when researching a stock so above you can see the gauge for AIREA’s ROCE against it’s prior returns. If you’re interested in investigating AIREA’s past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
In terms of AIREA’s historical ROCE movements, the trend doesn’t inspire confidence. To be more specific, the ROCE was 5.0% five years ago, but since then it has dropped noticeably. 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 AIREA becoming one if things continue as they have.
The Bottom Line
In the end, the trend of lower returns on the same amount of capital isn’t typically an indication that we’re looking at a growth stock. However the stock has delivered a 98% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don’t bode well for long term performance so unless they reverse, we’d start looking elsewhere.
Like most companies, AIREA does come with some risks, and we’ve found 3 warning signs that you should be aware of.
While AIREA isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
If you’re looking to trade AIREA, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account.
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.