Yahoo Finance These Return Metrics Don't Make Metro Performance Glass (NZSE:MPG) Look Too Strong
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. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Metro Performance Glass (NZSE:MPG), the trends above didn't look too great.
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. To calculate this metric for Metro Performance Glass, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.029 = NZ$5.9m ÷ (NZ$241m - NZ$38m) (Based on the trailing twelve months to September 2021).
Thus, Metro Performance Glass has an ROCE of 2.9%. In absolute terms, that's a low return and it also under-performs the Building industry average of 11%.
Check out our latest analysis for Metro Performance Glass
In the above chart we have measured Metro Performance Glass' 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 Metro Performance Glass here for free.
What Can We Tell From Metro Performance Glass' ROCE Trend?
The trend of ROCE at Metro Performance Glass is showing some signs of weakness. To be more specific, today's ROCE was 13% five years ago but has since fallen to 2.9%. In addition to that, Metro Performance Glass is now employing 21% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.
Our Take On Metro Performance Glass' ROCE
To see Metro Performance Glass reducing the capital employed in the business in tandem with diminishing returns, is concerning. We expect this has contributed to the stock plummeting 74% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
Metro Performance Glass does have some risks, we noticed 4 warning signs (and 1 which is concerning) we think you should know about.
While Metro Performance Glass 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.
