Investors Could Be Concerned With Stoneridge's (NYSE:SRI) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Stoneridge (NYSE:SRI), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Stoneridge:

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

0.058 = US$17m ÷ (US$679m - US$382m) (Based on the trailing twelve months to September 2023).

Therefore, Stoneridge has an ROCE of 5.8%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 12%.

View our latest analysis for Stoneridge roce

Above you can see how the current ROCE for Stoneridge compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Stoneridge here for free.

The Trend Of ROCE

The trend of ROCE at Stoneridge is showing some signs of weakness. The company used to generate 18% on its capital five years ago but it has since fallen noticeably. What's equally concerning is that the amount of capital deployed in the business has shrunk by 28% over that same period. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

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On a side note, Stoneridge's current liabilities have increased over the last five years to 56% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 5.8%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

What We Can Learn From Stoneridge's ROCE

In summary, it's unfortunate that Stoneridge is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 36% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a separate note, we've found 1 warning sign for Stoneridge you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this freelist of companies with good balance sheets and impressive returns on equity.

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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.