Returns On Capital Signal Difficult Times Ahead For Gentherm (NASDAQ:THRM)

When we’re researching a company, it’s sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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 combination can tell you that not only is the company investing less, it’s earning less on what it does invest. And from a first read, things don’t look too good at Gentherm (NASDAQ:THRM), so let’s see why.

Understanding Return On Capital Employed (ROCE)

For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Gentherm is:

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

0.093 = US$66m ÷ (US$947m – US$239m) (Based on the trailing twelve months to June 2022).

Thus, Gentherm has an ROCE of 9.3%. In absolute terms, that’s a low return but it’s around the Auto Components industry average of 10.0%.

See our latest analysis for Gentherm

Above you can see how the current ROCE for Gentherm compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Gentherm’s ROCE Trending?

There is reason to be cautious about Gentherm, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 16% that they were earning five years ago. 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. So because these trends aren’t typically conducive to creating a multi-bagger, we wouldn’t hold our breath on Gentherm becoming one if things continue as they have.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren’t exactly signs of a compounding machine. The market must be rosy on the stock’s future because even though the underlying trends aren’t too encouraging, the stock has soared 117%. In any case, the current underlying trends don’t bode well for long term performance so unless they reverse, we’d start looking elsewhere.

On a final note, we’ve found 2 warning signs for Gentherm that we think you should be aware of.

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

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.