Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at OC Oerlikon (VTX:OERL), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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 OC Oerlikon, this is the formula:

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

0.042 = CHF133m ÷ (CHF4.6b - CHF1.4b) (Based on the trailing twelve months to December 2023).

Therefore, OC Oerlikon has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 14%.

See our latest analysis for OC Oerlikon

Above you can see how the current ROCE for OC Oerlikon 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 OC Oerlikon for free.

What Can We Tell From OC Oerlikon's ROCE Trend?

In terms of OC Oerlikon's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.6% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on OC Oerlikon becoming one if things continue as they have.

What We Can Learn From OC Oerlikon's ROCE

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. Long term shareholders who've owned the stock over the last five years have experienced a 56% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.