To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Bravura Solutions (ASX:BVS), we weren't too hopeful.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Bravura Solutions is:

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

0.098 = AU$15m ÷ (AU$229m - AU$78m) (Based on the trailing twelve months to June 2024).

Therefore, Bravura Solutions has an ROCE of 9.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.8%.

Check out our latest analysis for Bravura Solutions

Above you can see how the current ROCE for Bravura Solutions compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Bravura Solutions .

What The Trend Of ROCE Can Tell Us

In terms of Bravura Solutions' historical ROCE trend, it isn't fantastic. The company used to generate 14% on its capital five years ago but it has since fallen noticeably. In addition to that, Bravura Solutions is now employing 50% 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. 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.

On a side note, Bravura Solutions' current liabilities have increased over the last five years to 34% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 9.8%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Bravura Solutions' ROCE

In summary, it's unfortunate that Bravura Solutions is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 54% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.