Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Klingelnberg (VTX:KLIN), we've spotted some signs that it could be struggling, so let's investigate.

What Is 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 Klingelnberg is:

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

0.057 = €8.7m ÷ (€286m - €134m) (Based on the trailing twelve months to September 2023).

Thus, Klingelnberg has an ROCE of 5.7%. Ultimately, that's a low return and it under-performs the Machinery industry average of 15%.

See our latest analysis for Klingelnberg

Above you can see how the current ROCE for Klingelnberg 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 Klingelnberg here for free.

What Can We Tell From Klingelnberg's ROCE Trend?

We are a bit worried about the trend of returns on capital at Klingelnberg. About five years ago, returns on capital were 14%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect Klingelnberg to turn into a multi-bagger.

On a side note, Klingelnberg's current liabilities have increased over the last five years to 47% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 5.7%. What this means is that in reality, a rather large portion of the business is being funded by the likes of the company's suppliers or short-term creditors, which can bring some risks of its own.

The Key Takeaway

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 56% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.